What is a Surety Bond?
While there are many different varieties, a surety bond is simply an agreement between three parties:
- Principal: the person who needs the bond
- Obligee: the person who is protected by the bond, such as the government entity
- Surety: the person who issues the bond
The surety provides a financial guarantee to the obligee that the principal will fulfill their obligations. It ensures contract completion in the event of principal default. An obligee seeks a principal to fulfill a contract. The principle obtains a surety bond from a surety company. If the principal defaults, the surety company is obligated to find another principle to complete the contract or compensate the obligee for the financial loss incurred.
When do I Need a Surety Bond?
Any Federal construction contract valued at $150,000 or more requires a surety bond as a condition of contract award or when bidding. Most private entities as well as municipal and state governments have similar requirements. Many service contracts, and sometimes supply contracts, require surety bonds too.
What Does a Surety Bond Guarantee?
For license and permit bonds, the surety guarantees that a principal understands and follows the regulations specified for their particular license. Examples of license violations include late payment, fraud or misrepresentation. If a covered violation causes a claim against the bond that the principal is unable to resolve, the surety is required to pay the claim to the obligee.
Surety bonds in the construction industry usually ensure that a bonded principle will fulfill the obligations listed in a signed contract. If a bonded principal defaults on the contract, then the surety guarantees that the obligee will be made whole. This includes either taking action to make sure the work is completed according to the terms of the contract or a financial payout.
Are Surety Bonds Insurance for my Business?
This is a common misconception about surety bonds and is not true. Bonds are more like insurance for the customers or public, which you are required to pay for. Surety bonds are a cost of doing business with the U.S. Government. It is important to understand the difference between general liability coverage and a surety bond so that you can receive the right type of coverage for your business.
To find out more about surety bonds and if they are right for your business, contact The ProSure Group, Inc. Our advisors are eager to help you receive the proper coverage for your business.