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Surety Bonds

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What is a Surety Bond?

Surety Bonds are different than insurance. With insurance, the insurance company accepts the risk of loss and charges a premium for this transfer of risk. With a surety bond, the bonding company (the surety) charges a fee for a guarantee to a third party (the obligee) but the bonded party (the principal) retains the responsibility to repay the penalty or obligation. The bond gives the third party, the entity protected by the bond's guarantee, a recourse to satisfy the obligation covered by the bond.

Warning: If you default on a bonded obligation and the bond penalty is paid, the surety company will then attempt to collect the penalty from the principal (if you bought the bond, that's you). Bonds are typically backed both by company assets and by your personal assets.

Who's Who with Surety Bonds?

The Principal - If you are buying the bond, that's you. This is the entity that undertakes the obligation guaranteed by the bond.
The Obligee - The entity that receives the benefit of the bond. This is who is protected by the bond.
The Surety (Surety Bond Company) - The bond issuer that guarantees the obligation specified by the bond.

Types of Surety Bonds

Auto Title Bond - This is a state requirement for issuing a title for an automobile after the original title has been lost. It guarantees the new title against challenges.

Bid Bond - A bond that guarantees that a bid offered will be honored. These are often required when bidding for a large construction project.

Fidelity Bond - A bond that guarantees the honesty of employees that handle money or have access to client's property. An example would be a Janitorial Service that bonds employees that are cleaning business locations. The bond provides protection to the customer against theft by the services employees by guarantying any theft is made good by the Janitorial Company.

Fiduciary Bond - A bond that guarantees the faithful duty of an administrator, trustee or other fiduciary that handles the financial affairs of another.

License / Permit Bond - A bond required to obtain a permit or license from a city, county or other government entity. The bond guarantees whatever is specified by the ordinance, license or other regulation.

Notary Public Bond - A bond required by statute to guarantee the proper actions of notaries.

Payment Bond - A bond that guarantees timely compensation for workers, suppliers and subcontractors.

Performance Bond - A bond that guarantees a construction contract terms will be fulfilled. The Payment and Performance bonds are often sold together as a package.