When you hear that a business or contractor is bonded and insured you know that they are trustworthy and professional. Only companies that are bonded may bid on government jobs, and bonded companies are more likely to win bids and gain business.
While most people are familiar with what is means to be insured, the process of being bonded may be a mystery to some. When a company is bonded it means that they have purchased a Surety Bond for their contract. So, what are Surety Bonds, and what do they do for a business and their clients?
Surety Bonds are contracts between three parties to ensure the completion of work by one party – the principal – for another party – the obligee – by the Surety – the agent that ensures the obligee that the principal will abide by the terms of the contract.
What Are Surety Bonds?: How Surety Bonds Work
What are Surety Bonds? With a Surety bond, the Surety consents to uphold the promises outlines in the contract for the benefit of the obligee. If the principal – the primary party responsible for completing the contract – fails to uphold their end of the contract the Surety will be responsible for investigating and paying on the claim.
The Surety Bond ensures that the principle party is credible, and ensures the completion of the contract per the requirements of the obligee. The principle usually pays a premium – typically annually – in exchange for the Surety Boning company’s financial strength to extend Surety credit.
The penal sum is a key term in almost all Surety Bonds, as it specifies the sum of money that will be required to be paid in the event of default on the part of the principle. This allows for the Surety to ascertain the risks that may be involved in issuing the Surety Bond, and charge premiums accordingly.
In the even that both the principle and the Surety default, the bond is rendered worthless. For this reason, Sureties are often issued by insurance companies, who’s solvency is substantiated by government regulation, private audit or both.
A Surety Bond can also be used for securing the appropriate execution of fiduciary duties by people who are in the position of public or private trust.
What Are Surety Bonds?: Commercial Surety Bonds
The various range of bond types that do not fit into the categorization of a contract are commercial bonds. Commercial bonds are separated into sub-types including, court, license and permit, public official, and miscellaneous.
Certain municipal, state and federal governments require license and permit bonds to engage in certain businesses. The function of these bonds is to act as a assurance to a government and its constituents that a corporation will comply with a regulation, municipal ordinance, state law, or underlying statute.
For more information on commercial surety bonds, the financial help center at online brokerage ETrade offers comprehensive information concerning examples of commercial bonds, their functions, and requirements.
Court Bonds function as a means of defending against legal action, and are posted by parties seeking court remedies, and some examples of judicial bonds include, bail bonds, injunction bonds, and appeal bonds.
The faithfulness and honesty of an elected or appointed official in government office is guaranteed by public official bonds. Some examples of public official bonds include judges, commissioners, treasurers, and notaries.
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