It has been estimated that there may be as many as 25,000 different types of surety bonds issued throughout all the states of this country, but despite the enormous variety of types, all surety bonds serve the same purpose: to protect customers of a business. This might seem a little surprising, given the fact that the purchasers of surety bonds are generally the companies or contractors themselves.
However, the way surety bonds work is actually to provide at least a measure of insurance that a professional will not attempt to defraud them. When customers of any business or contractor feel they have been given inadequate service, or harmed in any way by the workmanship done by the company, they would have the option of making a claim against the bond purchased by the contractor.
Despite the fact that the bond acts to protect the customer in a hiring arrangement, the contractor does receive some benefit from purchasing the bond, because it makes his business seem more reliable and trustworthy, due to the financial backing if he fails to meet requirements. So while bonding acts as a business advantage for a contractor, it acts more like insurance for a customer of that contractor. Investopedia does a good job of describing what is bonding insurance.
Bonding Insurance Definition
Surety bonds are legally binding contractual agreements made between three parties, for the purpose of providing a degree of confidence to customers that work will be done properly and in compliance with any relevant rules or regulations. The first party is the principal, who is the contractor or business entity purchasing the surety bond. The principal purchases the bond either because he has been required to do so by a hiring company, or because he wishes to obtain the business advantage of being bonded, because it acts as a guarantee of performance.
The company which hires the contractor is the second party in this arrangement, and is known as the obligee in legal language. In this situation, the hiring company is actually the customer, and as always, the surety bond protects the customer from any kind of malpractice, fraud, or work abandonment on the part of the contractor.
The third party in this arrangement is a surety company, which is a financial organization serving a role similar to an insurance company, in that it sells the surety bond to a principal after having approved the principal’s application for a specific type of surety bond. If the principal fails to live up to the terms specified by the obligee, the surety company would be obliged to pay out a sum of money equal to damages caused by poor workmanship or abandonment. After having satisfied the obligee’s claim, the surety company would then seek reimbursement from the principal who failed to live up to terms of the agreement. We only bond with top-notch employee bonding insurance companies such as Nationwide/Allied, Travelers Surety, Hudson, and Western National.
How surety bonds work
There are three functions inherent in the issuance of any surety bond, the first being a kind of insurance to a customer that work performed by a contractor will meet specified standards of quality and completion. Surety bonds also serve to make a contract or business entity more appealing to customers, just because of that level of insurance built in which gives the customer recourse should anything go wrong. The third function associated with the purchase and issuance of any surety bond is that the surety company involved provides a financial guarantee, promising to pay the hiring company any monetary claim made against the contractor, if legitimacy can be proven.
Why you need to get bonded
In some cases, getting bonded is actually a condition of employment, and a hiring company will refuse to even consider candidates who are not bonded. This is understandable, given that employers would naturally want some kind of assurance that quality workmanship will be completed on time. Even if a hiring company does not require bonding, it is advantageous for a contractor to get bonded, simply for the business appeal it provides. Potential customers feel much safer hiring a contractor who is bonded, because they can be reimbursed in the event of substandard work or abandonment. Without bonding, there would be no such possibility for a hiring customer.
Examples of how bonding can help people
One of the most popular of all surety bonds is the license and permit surety bond. This type of bond is often required by states as a pre-condition to obtaining a license to operate in that state, and it offers significant assistance to the general public in situations where they might need the services of a professional. When hiring an electrician for example, it would be prudent to select a professional having a license and permit surety bond, because that bond requires a certain level of training and study on the part of the professional, so any customer could be sure of at least some level of expertise.
Another very popular type of surety bond is the fidelity bond. A business wishing to protect itself against employee theft, embezzlement, or fraud, can purchase this type of bond so it can be compensated if any of those eventualities should take place as a result of employee actions. ERISA bonds are also important. While the company may not be fully reimbursed for losses, it would at least recover partial value from any kind of employee malfeasance.
Industries that require a bond
The industries most commonly requiring contractors to be bonded are the construction industry, government agencies, janitorial services, and temporary staffing companies. Of these, the two biggest users of surety bonds are government organizations and the sprawling construction industry in this country. It’s easy to see why each of these major players would need some kind of insurance to protect itself against non-compliance, poor workmanship, or work abandonment. If you want to learn bonding insurance definition, call the pros at NFP Surety today! We can get your employees bonded insurance through companies like Zurich, Suretec, Old republic, and RLI Surety.
NFP Surety has been the leader in employee bonds since 1984! Let us show you how to get properly bonded.