A surety bond is a three-party agreement that guarantees the performance or payment of an obligation to an obligee. A variety of businesses and individuals use them to demonstrate financial responsibility and meet legal requirements.
Most often, the bonds are required for licensing and permitting purposes. They are typically purchased by the principal and backed by a third party, the surety company.
What is a surety bond?
A surety bond is a financial guarantee that someone will meet an obligation. This can include completing work within a specified time frame, paying a debt, or complying with the laws of your region. The parties involved in surety bonds are three-fold: the principal, the obligee, and the surety company (similar to an insurance carrier).
For example, say a government agency hires your business to build a road. The agency is the obligee and it wants a guarantee that you will complete the work as contracted. To assure the obligee, you (the principal) enlists a third party to write an agreement or bond on your behalf called a surety company. This company stands behind your guarantee and will compensate the obligee up to a specific amount, should a claim arise. The principal must then pay back the surety company.
When you are told that your business must obtain a surety bond, it is best to contact an agency that specializes in these types of bonds. They are familiar with the requirements and typically partner with reputable A-rated companies to provide competitive quotes. You can also research the specific bond requirement online to get an idea of what the process entails.
Types of surety bonds
There are many types of surety bonds, depending on your industry and regulatory requirements. For example, auto dealerships, private schools and collection agencies are regulated by the state and require bonds to operate. These industries are typically viewed as higher risk to consumers in terms of unethical or illegal business practices, so bonding is required to help mitigate those risks.
Contract surety bonds are set between contractors (the principals) and subcontractors or suppliers to ensure they will get paid for work/materials delivered on a project. License and permit bonds are a common type of bond that is required by the state to get a business license and/or operating permits. Fiduciary bonds guarantee that a person or company acting as a fiduciary in a legal setting, such as a guardian or conservator, will not lose assets they are managing for another party.
Fidelity bonds protect customers or clients of a business against theft, property damage or malpractice by employees of the bonded company (the principal). Finally, miscellaneous surety bonds cover a wide range of other specific situations, like importer/exporter bonds or federal/miscellaneous bonds. Viking Bond Service can reassess the risk for each surety bond applicant at renewal, which may result in lower premiums for our clients if their credit and financial standing have improved. This is one of the ways we help businesses compete against larger, established players in their markets.
What are the benefits of a surety bond?
Most businesses obtain insurance to protect themselves against risks, such as liability for property damage and workers’ compensation coverage in case an employee is injured on the job. A surety bond, however, is different in that the bonded party takes on the responsibility of any claims against them.
There are many benefits to obtaining a surety bond. Most importantly, it gives customers and clients confidence in your company because you and your business went through a thorough review process to become bonded. It also opens doors for your business by allowing you to bid on projects that require bonds, like federal and state government contracts.
The other primary benefit is that if your customer feels they are not getting the services and products they paid for or that you have violated a contract’s terms, they can file a claim with the surety to recover losses up to the bond’s coverage amount. Unlike a bank instrument such as a letter of credit, the surety will validate the validity of any claims and only pay out funds if necessary.
In addition, the bonding process typically requires a principal to sign an indemnity agreement that pledges their personal and company assets as security against any claims made against them. This is a much more rigorous process than a typical insurance policy, but it allows the surety to know that the principal will make good on any claims against them.
How do I get a surety bond?
A surety bond is a three-party agreement that guarantees performance of a contract, payment of a debt, or compliance with a law or regulation. It’s similar to insurance in that a party (the principal) purchases a bond from a company (the insurer) and transfers their financial risk of undesirable events to the insurance firm.
The principal’s name, business details, and financial information are all submitted to the bonding company to get a surety bond quote. If the surety bond is approved, a signed policy is issued and sent to the principal. The principal then submits the bond to the government agency or other governing entity that requires it.
Many professions, businesses, and contractors require a surety bond as part of their licensing process at the state or local level. In some cases, a government agency will only issue a work license or professional permit to the bonded principal.
To become bonded, the requesting party needs to research the specific bond requirements and coverage amounts for their particular state or municipality. Then they need to find a licensed surety bond producer that can meet those specific requirements. This can be done with a simple online search. The bonding agent can answer questions about the process and help with any specific application requirements. Renewing the bond is usually a straightforward process, but the underwriter will need to re-evaluate the applicant’s credit risk each year. This may result in an increase or decrease in the bond premium each year.