Define Surety Bond
In order to do so, we need to understand what a surety is, what a surety company is, and what principals and obligees are. All these terms are closely associated with sureties, which act as a kind of guarantee of performance for professionals who have certain skills within their fields. If you were to look up the word ‘surety’ in the dictionary, you’d find that it means the state of being sure or certain about something, and that’s exactly what is sought with bonds – to be certain about work performance from contractors whom you have hired to do work for you.
They are a contractual agreement between three parties which are known as a principal, an obligee, and a surety company. The purpose of the bond is to act as a kind of insurance for the obligee that some kind of work agreed to by the principal will be performed in a timely manner, in accordance with any relevant rules or regulations, and will be performed in a manner meeting standards of quality workmanship.
Without this type of guarantee in place, there would be very little which forced a principal to do quality work for a client, other than to maintain his reputation. In the event that any of the terms agreed to in the contractual arrangement are not lived up to, the obligee would have the right to make a claim against the surety to recover financial damages suffered. The fact that this money is available in association with the bond gives and obligee some assurance that he will not suffer a total loss because of poor workmanship or noncompliance by a contractor.
The Role of the ‘Surety’ in the Bonding Process
As part of the ‘ define surety bond process’, we can consider the surety in a bonding arrangement to be an insurance company or financing company which agrees to sell a surety to a principal, for an amount of money which is generally equal to some percentage of the face value of the bond. In many cases, the surety also sells other financial products like insurance policies, since these two products are closely related, and since the financial mechanisms are similar.
When a claim is made against a bond, the company is obliged to pay out the amount of that claim, assuming it can be validated, so that the obligee does not suffer financial losses. So that the surety does not suffer financial losses, it would then have the capability of pursuing the principal to recover the entire amount of any claim that it had to pay out to the obligee.
The financial responsibility would end with the principal however, since he is the party which failed to live up to the terms of the agreement in the first place. Legally, the principal would be required to pay the entire balance of any claim which the company already was obliged to pay out to the obligee party.
How Sureties Work
Sureties work in much the same way that an insurance policy does. With an insurance policy, an individual is guaranteed to receive a specified amount of money when a certain triggering event occurs, generally the death of the policy owner. In this case, the insurance acts as a guarantee of compensation for the untimely departure of that individual for whom the policy is issued.
In a bond, the sum of money tied to the bond itself acts as a guarantee of compensation if certain conditions which are specified in the bond are not met by the principal party. The triggering event could be non-compliance with local laws, it could be an abandonment of a project before completion, or it could be completion of work in a haphazard and unsatisfactory manner, deemed to be unacceptable workmanship.
If the obligatee party which ordered the project or work to be done, did not have recourse to make a claim to be reimbursed for poor work, it would be in a position of suffering potentially devastating losses. Sureties prevents this from happening by providing financial guarantees of compensation for work which is deemed unsatisfactory in some way.
Types of Sureties
The two main categories of sureties are commercial and construction sureties. There are several types of construction bonds, including payment and performance bonds, bid bonds, and site renovation bonds, but almost every other bond not included in these types would then fall into the category of commercial sureties. Let us help you get bonded today. You won’t be disappointed!
NFP has relationships with several of the top bonding carriers in the nation, including (but not limited to) Old Republic Company, Western National, and HCC Tokio Marine. Whatever your bonding needs, we have access to a carrier, and have the expertise to make sure you are properly bonded for your industry type! Call us today, at (800) 863-3210 to learn how easy our bonding process can be! Let us define surety bond in terms that make sense to you. How to get bonded and insured for a small business? call us to learn how easy it can be.
Industries that require sureties
Almost every industry in this country makes use of bonds, and since there are an endless variety of bonds, they can be used to cover virtually any scenario which arises in business, or where some kind of work guarantee is necessary. One of the industries that makes the greatest use of sureties are the construction industry (construction bonds), and it’s easy to understand why that would be so.
Since all major construction projects rely on a general contractor to hire and manage a whole set of subcontractors with particular professional specialties, it becomes of critical importance that there are some guarantees of project completion and task completion for all contractors and subcontractors involved. Without these kinds of assurances, the whole construction project model would quickly break down, and it would be hard to rely on any work being done on time, in compliance with the regulations, and in accordance with standards of quality workmanship. General contractor bonds are a must have!
Another major user of sureties are governmental agencies, and this is true from the smallest levels of government, all the way up to the federal government itself. Since all these agencies are responsible to their constituents for work being done according to what was agreed to, there must be some mechanism which motivates hired contractors to complete work as specified. Without this type of insurance in place, taxpayers’ money might be frittered away on projects that had little chance of being completed as scheduled. We also specialize in lottery bonds USA, so check out our dedicated page. Caregiver insurance bonds are also available.
Surety by NFP
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