What Is A Surety Bond And How It’s Useful

Brian Eugen
By Brian Eugen 8 Min Read
8 Min Read

A surety bond is a contract that binds a person or company to pay a financial penalty if a predetermined event occurs. In the specific case of a surety bond, a third party guarantees a potentially liable party’s financial obligations if the party defaults on a contract. In this post, you will learn what they are precisely and how they might be helpful to you.

What Is A Surety Bond?

A surety bond is a guarantee that the person or company will do what they have promised. A surety company will issue a bond to the customer, and the customer will then use this as collateral for their agreement with the client. In some cases, a surety bond might be necessary to cover all or part of a contract. The “surety” of this type of bond is the third party who agrees to be responsible for contractual obligations if someone fails to meet them. For someone to be eligible for this type of warranty, they must have enough money or assets to be put at risk if they fail to keep their commitments under contract law.

It is worth noting that while these bonds are required in all states for specific work, the process and requirements can differ on a state-by-state basis. This means that acquiring surety bonds in Pennsylvania will vary from those in California, for example. Additionally, they are often provided on a municipal level which means even further granularity regarding the process, etc. Many similarities exist between them, but you should know this before you begin the process of getting one.

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Surety Bonds: Who Are They For?

Business and individual entities both purchase surety bonds. The majority of surety bonds are purchased to meet government regulations related to occupational licensing. In all states, guaranteeing compliance and financial obligations associated with licenses and permits are mandatory, regardless of their industry or profession. Fundamentally, this kind of bond demonstrates to customers and prospects that a business is financially responsible and committed to ethical business practices. Some common examples of people requiring these bonds include:

  • The need to get licensed: Surety bonds are required in specific industries, known as license or permit bonds. The License and permit bond ensures that you will fulfil your business responsibilities faithfully and ethically. Essentially, they are used when you need to prove that you are trustworthy and will honor the service you are providing.
  • You will begin a commercial construction project: The contract requires the contractor and owner to sign a performance bond to guarantee the work will be completed within specified and agreed-upon deadlines. These can be issued to individual contractors or construction companies to win construction bids and get more work.
  • A court proceeding requires one: When a court proceeding is in progress, the court may ask you to obtain a Court Bond. The purpose of court bonds is to protect against financial loss incurred by participating in court proceedings.
  • You need your business to be protected: This type of bond requires a fidelity bond. Your company can use a fidelity bond in cases of theft, fraud, or employee fraud not generally covered by standard insurance.
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What is the Surety Bonding Process?

The surety bonding process begins with the Principal applying for a bond. The surety company reviews the application and decides to issue the bond or not. If they do, they collect information about any collateral that must be posted and any co-signers who will provide an additional guarantee for the bond’s performance. If you’re applying for a contract with high stakes, there’s likely to be an insurance requirement to protect the surety company. The surety will also need additional information about your company’s financial stability before they can approve you for coverage. They’ll want to see your last three years’ worth of tax returns and balance sheets to verify your ability to pay any claims should they arise.

Typically, the surety bond application will require basic information such as the name of the business and the address of its owners. Occupational license numbers and employer identification numbers (EIN) may also be contained in the application so that underwriters may review a person’s and a business’s credit history. The surety company may also request business and personal financial information.

Do Surety Bonds Take Long to Get?

Although these bonds are needed to start work, they are usually provided on the same day, depending on many factors. However, getting a surety bond may take some time, depending on how much money it covers and who provides the coverage. Despite this, much of the underwriting process is automated to facilitate a quick approval and pricing process. Most of the time, if additional information is required, the surety issuing companies allow you to send the information electronically, thereby speeding up the process.

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Precisely Who Is Protected By A Surety Bond?

A surety bond protects the person who is paying for work. That person can be a homeowner, property developer, government agency, corporation, contractor, or architect. Regarding construction specifically, it protects the project owner from any damages done by the contractor. The surety company guarantees that any obligations will be fulfilled, and if they are not, they are responsible for damages caused by their contractor.

What Are The Most Common Types Of Surety Bonds?

There are four types of bonds that are commonly sought after for various reasons. These include:

  • License and permit: A license and permit surety is an individual or company that has agreed to ensure that all the legal requirements for a particular business are met.
  • Construction bonds: The construction surety bond is a type of financial security that guarantees the completion of a construction project or job.
  • Commercial Bonds: A commercial surety bond protects the public from financial loss by companies.
  • Court Bonds: Court bonds are general terms used to describe any type of surety bond needed when filing a lawsuit in court.

A surety bond is a type of insurance that guarantees a certain amount will be given to the creditor if the given terms and conditions of the agreement are met. Surety bonds are used to safeguard against loss and to reduce the potential risk of insolvency. Anyone working in construction can tell you how important it is to have a surety bond to protect against loss and minimize the potential insolvency risk.

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Brian Eugen is a tech-savvy wordsmith with a knack for captivating readers through his expertly crafted tech blog articles. His passion lies in dissecting the intricacies of technology, particularly in the realms of Android, Windows, internet, social media, gadgets, and reviews. With a deep understanding of the latest trends and a talent for simplifying complex concepts, His articles offer readers valuable insights and up-to-date information. His expertise in writing and genuine love for all things tech make him a trusted source in the digital landscape.
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