Surety bond Totally Explained

Everything about Surety Bond totally explained

A surety bond is a contract among at least three parties:

The principal - the primary party who will be performing a contractual obligation
The obligee - the party who is the recipient of the obligation, and
The surety - who ensures that the principal's obligations will be performed.

Through this agreement, the surety agrees to uphold - for the benefit of the obligee - the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, for example, to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement.
There are two main categories of bond types: contract bonds and commercial bonds. Contract bonds guarantee a specific contract. Examples include performance, bid, supply, maintenance and subdivision bonds. Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc.
Suretyship bonds originated hundreds of years ago as a mechanism through which trade over long distance could be encouraged. The first corporate surety firm in the United States was United States Fidelity and Casualty Company of New York, established in 1880. According to the Surety & Fidelity Association of America

annual US surety bond premiums are approximately $3.5 billion. State insurance commissioners are responsible for regulating corporate surety activities within their jurisdictions. The commissioners also license and regulate brokers or agents who sell the bonds.
   Surety bonds are frequently used in the construction industry: in order to obtain a contract to build the project, the general contractor (and often the sub-contractors as well) must provide the owner a bond for its performance of the terms of the contract. Conversely, owners and contractors may also provide payment bonds to ensure that subcontractors and suppliers are paid for work done. Under the Miller Act, payment and performance bonds are required for general contractors on all U.S. federal government construction projects where the contract price exceeds $100,000.00.
   Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.
   A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly.
   If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both.
   The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.
   A bail bond is a type of surety bond used to secure the release from custody of a person charged with a criminal offense. Under such a contract, the principal is the accused, the obligee is the government, and the surety is the bail bondsman.

Examples

Examples of Surety Bonds:

Bid Bond

Performance Bond

Advance Payment Bond

Retention Payment Bond

Maintenance Bond

Contractor License and Permit

Court

Customs

Lost Securities

Money Transmitters

Mortgage brokers

Motor Vehicle Dealers

Notary

Patient Trust Funds

Probate

Public official

Tax bonds

Telemarketing

Subdivision

Utility deposit

Wage and Welfare/Fringe Benefit (Union)

Public Warehouse

Supply bonds

Online Transaction Supply Bonds

Self–Insured Workers compensation

Insurance Company Qualifying

Reclamation Examples of fidelity bonds:

ERISA

Business Service Bonds

Public Official

Manufacturers

Small Businesses

Non-Profit Organizations

Real Estate Managers

Title Agents

Financial institutions

Precious Metal Exposures

Armored Car

License and permit bond

License and permit bonds are a general class of surety bonds required of a person or entity to obtain a license or a permit in any city, county, or state. These bonds guarantee whatever the underlying statute, state law, municipal ordinance, or regulation requires. They may be required for a number of reasons, for example the payment of certain taxes and fees and providing consumer protection may be required as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.

Further Information

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