You may be wondering precisely what a surety bond actually is. The simple answer is that an Alabama surety bond is a contract between three different individuals or entities. We refer to it as both a surety and a bond. The first is the principal, the individual who is required to purchase the bond. The second is the obligee, who is the party that is requesting the bond. The last is known as a surety; this is the insurance company who guarantees the bond between the principal and the obligee.
In essence, an Alabama surety bond is a promise to the obligee that if the principal cannot or does not meet their obligations, the principal or the surety will reimburse the involved obligee in a financial way (or by fulfilling the contract in some other way).
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Usually, when you buy insurance, it is for you or your business. A surety is a bit different. With a bond you, the principal, are paying for insurance for the other party, an obligee. You pay for the bond which a surety guarantees and the obligee can file claims against if needed.
How Surety Bonds Work in Alabama
If you are unable to provide what you promised to the involved obligee, the bond gives them the ability to file a claim stating that the bond obligations were not met. In this way, it is insurance to an obligee, as not fulfilling the bond will leave you required to pay both the bond amount as well as any legal fees involved. How the surety factors into this is typically that they will require you to sign an agreement, which says that your business and personal assets will be used to pay any claims that might come up.
In layman’s terms, a surety is there to say “this person can pay if a claim comes up.” However, if you are unable to pay, the surety will then be on the hook for the payment. This is why the indemnity agreement is also included, to offer a form of insurance to the surety as well.
Misconceptions About Sureties
Some people may refer to bonds as “insurance,” and wrongly assume that these bonds are in place to protect your business. This is not the case. Bonds protect the obligee. Insurance that protects your own business is an entirely different option. For more about that, you may want to research fidelity bonds. Those are there to provide you protection against certain matters that occur to your business.
Why Alabama Bonds Exist
You may find yourself wondering what the bond actually is useful for if you will have to pay for any claims. The reason for a surety is that it protects the involved obligee. However, surety bonds also provides a means of credit for you. We will explain that more in-depth below.
Alternatives to Bonds
Some obligees will allow you to give them, or a trustee, money that will act as an alternative to a bond. In some cases, an Irrevocable Letter of Credit can also be an alternative. The problem is that both of these have some pretty significant downsides. We will look at those now.
- By choosing an alternative, you have to put the entire amount down. This is the difference between using assets as security to an obligee or using a signature.
- You will not have to bother with the cost of bond premiums, but you will lose any income from that money while the project is underway. This will typically cost more than the surety would have.
- Choosing to post assets instead of a bond will decrease the money you have available as capital.
- Reasonable investigation into claims may not occur when using your assets instead of the bond. With a surety, the insurance company would do a thorough investigation before paying any claim.
- Having less capital available can lead to a higher risk of bankruptcy or defaulting on one of your contracts.
Alabama Bonding Company
The first thing you will need to do is figure out which bond you need. There are tons of different bonds, and they all have different requirements. The last thing you want to do is buy the wrong one, which will then be rejected by the party acting as the invested obligee.
For those who need to get bonded for one particular contract, a contractor bond is what you will want to get. If that is not the case, you will need to look at the categories below and determine which best fits.
- Fidelity – This bond provides insurance for your company.
- Court – This type of bond is only required by a court of law.
- License – This will typically be required when there is a need for a permit or license, but not for a particular single contract.
Benefits of Alabama Bonding Solutions
At this point, it may make sense why a bond is a better option than the alternatives. It gives protection to an obligee, but it also provides a benefit to you in that you are not putting up capital as you would otherwise be. You also have the surety behind you to ensure claims are legitimate if any come to light during the contract period.
Sureties help with both legitimate claims, as well as any false ones. The company acting as surety is on your side and helps with handling any complaints that come up. They also have a responsibility to an obligee to ensure any claims that are authentic are paid or otherwise resolved.
NFP Surety is the premier and affordable Alabama Bonding Company, and we also provide fidelity bond insurance. Every surety is prepared on a specific bond form, as prescribed by the entity requiring the bonding (Obligee). Below is a list of surety types that are commonly requested in Alabama. Apply for your AL bond now by completing our online application. If you prefer, you may download an application to complete and fax or email to our bond insurance agency for processing.
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