Surety 101: Understanding Surety Bonds
For most private businesses and municipal governments, surety bonds are the preferred approach for guaranteeing the performance of obligations between entities. Put simply, surety bonds exist to ensure contract completion in the event of default from one party.
The accompanying graphic offers a visual representation of the relationship between the parties involved in a surety bond agreement — one party, the surety company, guarantees to another party, the obligee (or project owner), the performance of an obligation by a third party, the principal (or contractor). In the instance that the principal defaults, the surety company is obligated to find another principal to complete the contract or compensate the project owner for the financial loss incurred.
While a surety bond provides protection for the obligee, the surety is not responsible for any premium costs or financial losses. Typically, the principal will sign an indemnity agreement asserting that the principal will repay the surety if it should pay for a claim.
There are several types of surety bonds generally including:
- Bid Bond: Ensures the bidder on a contract will enter into the contract and furnish the required payment and performance bonds if awarded the contract.
- Payment Bond: Ensures suppliers and subcontractors are paid for work performed under the contract.
- Performance Bond: Ensures the contract will be completed in accordance with the terms and conditions of the contract.
- Commercial Bond: Such as license and permit bonds; Ensures an individual or business complies with rules and regulations of a municipality or government.
- Court: Required when individuals or businesses are involved in pursuing an action through a court of law.
- Business Service Bond: Protects your business against financial liability for the loss of your customer’s money, securities or personal property caused by dishonest acts of your employees while on your customer’s premise upon conviction.
With over 50,000 surety bonds with differing bond requirements in the U.S. alone, it’s essential that the company managing your bonds is experienced with a dedicated surety department. At Rose & Kiernan, Inc., our surety practice is based on unparalleled experience, expertise and an ability to solidify relationships and trust among the parties involved in the bonding process. We are able to handle your most involved and specialized bonding needs, and are structured to deliver superior service and streamlined surety solutions.
For more information on surety and how R&K’s expertise will help to meet all of your domestic and international bonding needs, please see the Surety section of our website.