A surety bond is a legally binding contract among three parties: the principal (the party required to obtain the bond), the obligee (the party requiring the bond), and the surety (the entity providing financial assurance that the principal will fulfill their obligations).
Surety bonds are required to ensure that the principal fulfills their obligations or duties as outlined in a contract or required by law. They provide financial protection to the obligee in case the principal fails to fulfill their commitments.
Various individuals and businesses may need to obtain surety bonds, including contractors, construction companies, mortgage brokers, auto dealers, notaries, and many others. Government agencies often require certain businesses to obtain bonds as part of the licensing or permit process.
Surety bonds come in many forms, including contract bonds (such as bid bonds, performance bonds, and payment bonds), license and permit bonds, court bonds, public official bonds, and fidelity bonds (also known as employee dishonesty bonds).
The cost of a surety bond, known as the premium, is typically a percentage of the bond amount. The premium percentage can vary based on factors such as the type of bond, the applicant's credit history, the risk involved, and the bonding company's rates.
While having good credit can make it easier to obtain a surety bond and may result in lower premiums, it's not always a requirement. Some surety bond companies offer options for individuals with less-than-perfect credit or provide alternative forms of collateral.
To obtain a surety bond, you'll typically need to complete an application and provide any required documentation, such as financial statements or a credit check. Once approved, you'll pay the premium and receive the bond, which you can then submit to the obligee.
If a claim is made against your surety bond, the surety will investigate the claim to determine its validity. If the claim is found to be legitimate and the principal fails to fulfill their obligations, the surety will compensate the obligee up to the bond amount. The principal is then responsible for reimbursing the surety for any losses incurred.
Surety bonds are typically issued for a specific term, often one year, and cannot be canceled midterm. However, if you no longer need the bond or wish to switch to a different bonding company, you can usually choose not to renew it at the end of the term.
Failing to obtain a required surety bond can result in various consequences, depending on the circumstances and the entity requiring the bond. These consequences may include being unable to obtain or maintain a license, losing a contract opportunity, facing legal penalties, or being unable to operate legally in certain industries. It's essential to comply with bonding requirements to avoid such issues.