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What is a Surety?

What is a Surety?

A surety bond is a legally binding contractual agreement between three parties, all of whom are involved in a work task or project which will be accomplished by the first of the three parties, known as the principal. The principal is usually a professional contractor offering services to the public for which he has been trained, and has been working professionally for some period of time.

The contractor is hired by a party known as the obligee, and the obligee hires the contractor with the understanding that certain terms specified in the surety will be lived up to, generally regarding quality workmanship, completion of all work specified, and within any time constraints imposed by the obligee. The third-party in this arrangement is a financial organization known as the surety company, which acts as a kind of insurance company that sells the surety to a principal. The surety must pay out an amount of money to the obligee when any claims are made against the bond.

How Do They Work

[To learn more about how do they work, and what is a surety, please call Surety by NFP at (800) 863-3210  If you prefer, go ahead and fill out our free online bonding application.  It only takes a few minutes to apply, and you could get bonded today (depending on the type)  All Nationwide insurance surety bonds!]

They work something like insurance, in that one of the parties in the surety agreement is protected against financial loss, and can be compensated if specific negative circumstances arise. With an insurance policy, that negative circumstance is usually the loss of life by an individual identified in the policy, for which the beneficiary would be compensated an amount of money identified in the terms of the policy itself.

What is a surety
What is a Surety?

In the surety, there is that same potential for a party to be compensated financially, but the condition which triggers that compensation does not involve loss of life – it has to do with certain bonding terms being unfulfilled. If the principal who purchases a surety fails to live up to the terms specified in the bond, then the company which hired the principal would be entitled to make a claim against that bond, to be reimbursed for the unfulfilled promise made by the contractor.

The mechanism which requires a contractor to live up to the terms agreed to is a very important one, because it provides a level of assurance to the obligee that quality workmanship will be completed on the project in question. If those terms are not lived up to by the contractor, the penalty can be very severe for that contractor, including a damaged reputation resulting from a claim made against the bond.

In addition, although the surety company would be obliged to initially pay out any claim made against the bond, the surety company would then seek financial redress from the contractor who failed to live up to terms of the agreement in the first place. This normally acts as a very strong incentive for a contractor to fulfill the terms of any work agreement made with the hiring company and is in truth, a kind of insurance for that obligee that work will be done in a satisfactory manner and will be completed on time.

The definition of surety, as it states on Cornell Law school, as, “when a party owes others legal duties, the party posts a surety to guarantee their performance.”  That’s a pretty good representation of how do sureties work.  We have a dedicated page that discusses how surety bonds work.  If you would like more information, call, email, or apply directly on our website.  Marriam-Websters’ definition of surety is, “a bond guaranteeing performance of a contract or obligation.”

Why you Need to get Bonded

Getting bonded can be an important business step for a contractor, because it provides some kind of assurance to the public or to a hiring company, that you will live up to your promises as a professional, and provide quality services that are agreed to. Contractors who are not bonded lack this kind of assurance that quality work will be completed on time.

Anyone considering the possibility of hiring a non-bonded contractor would not have the same level of confidence they might have in hiring a bonded contractor. In businesses where professional services are being offered, it can be very important that potential clients have confidence in your ability and workmanship, and bonding can provide that level of confidence, separating you from the competition.  Surety by NFP only bonds with top-rated carriers, such as Liberty Mutual, AM Trust Surety The Hartford, Zurich, Western National, HCC, Merchants Bonding Company, and many more.  Too many to list, but trust us, we have access to the most reputable carriers available.

Examples of how Bonding can Help People

Bonding really helps all three parties involved in the bonding arrangement. It’s beneficial for the contractor who purchases it because it provides a level of confidence for any client who may be thinking of hiring you. The obligee party in bonding agreement benefits by having protection against financial loss so that if the quality of workmanship is inadequate, the customer does not suffer a total loss. The surety company also benefits in this arrangement, because it sells a bond to the principal for an amount generally equal to between 10 and 15% of the face value of the bond.

Industries Which Require a Bond

Because sureties are useful to all three parties in this kind of contractual agreement, they can be extremely useful in virtually every industry in this country. Having confidence that a professional will provide quality services in the completion of a work project is a fundamental principle that all industries can take advantage of.

It’s easy to see why the construction industry would be one of the biggest users of sureties because, in any major project, a number of contractors might all need to be hired in order to have quality workmanship completed on time. Government organizations are another big user of sureties since they must account for taxpayers for funds spent on public works. Quite often, the hiring procedure for government organizations includes the selection of contractors who are bonded for the work to be done.

Definition of Surety

If you want to learn all about sureties, and how they work, then call our office at Surety by NFP.  Our amazing team of bond brokerage professionals are ready to help you get bonded!  We do all types of bonds, nationwide.  The definition of bonds is quite simple, and we’ll gladly explain it to you.  We look forward to helping you.

NFP Surety Administrator|User role
NFP Surety has been working in the insurance industry since 2008.

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