December 26, 2022
Mohith Reddy

Companies need assurance for contracts and other financial commitments to run a successful business. The surety bond guarantees cover the obligations, such as the timely completion of government contracts, covering court case losses, protecting a firm from employee falsehood, and others. In case of missing any one obligation on a surety bond, recompensation will take place to cover the overlooked requirements. So, what does a surety bond mean, and how is it unique from other insurance bonds?

What is surety bond insurance?

A surety bond is a written document involving third parties that ensures payment, compliance, and performance. It is a unique form of insurance among all types as it concerns the third-party agreement. The surety bond insurance retains three parties. They are:

1. Principal: 

The principal tells about the person's obligation to perform the act better when they buy the surety bond. In other words, when a person invests in a surety insurance bond and agrees to portray the task in a compliant manner is known as a principal. 

2. Surety:

It is an act of the bond or insurance issuer ensuring that the principal will perform in a compliant manner. The surety is liable to losses if the principal fails to perform as predicted.

3. Obligee:

An obligee is a person who needs assurance of the successful performance of the principal. Mostly local, state and federal government organizations are obligees and often receive the profits on the surety bonds. 

Components of surety bonds:

There are thousands of types of surety bonds across the country, focusing on their respective tasks. However, most of them carry a few characteristics in common. They are:

1. Bonding capacity:

The bonding capacity carries the information about the maximum amount a surety firm provides to the contractor. 

2. Working capital:

Surety companies require the principals to showcase their working capital - the current assets-current liabilities. Although the requirements depend on the principal, it is generally between 5% and 10% of the total bonded amount. 

3. Bond premium:

It shows information about the money a contractor pays the surety company upfront to provide the surety bond guarantee. So, the premium varies from the bonded amount to the bond amount. Nevertheless, it generally ranges from lower than 1% to as higher as above 15% of the total bond amount.

4. Bond term:

As the term indicates, the bond term displays the bond duration, after which it can be renewed if needed. A surety bond usually has a one to four-year term period. 

Working of a surety bond:

The surety bonds work when a surety pays a set amount of money to government agencies and commercial and professional parties (obligees) if a principal fails to fulfill the contract. Surety bonds help small contractors (principals) take up contracts assuring the customers that they will attain the customer's goals.

The principal must pay the rate or premium to the insurance company (surety) to obtain the surety bond. Therefore, the principal must sign an indemnity contract with the surety that tells the company and the personal assets to recompense the surety if a lawsuit emerges. And if these properties are lacking, the surety pays their own money to help the claim. 

Well-known types of surety bonds:

While thousands of surety bonds are in effect in India, a few widely heard surety bond insurance types are:

1. Contract surety bond

The contract surety bond guarantees the contractor's (principal) performance for a construction contract. If the contractor cannot complete the project, the surety firm must find another contractor to complete the project or refund the owner if there are any financial losses.

Common types of contract surety bonds are:

1. Bid bond

2. Performance bond

3. Payment bond

4. Maintainance bond

2. Commercial surety bond

As the term says, government entities use commercial surety bonds to protect social interests. Licensed businesses use these insurance bonds to ensure that they live by all rules and regulations as they commune with the well-being of society. Licensed contractors, lottery-ticket sellers, liquor stores, automobile dealers, and licensed professionals are a few principals of commercial surety bonds.  

A few types of Commercial surety bonds are:

1. License and permit bonds

2. Mortgage broker bond, and more.

3. Fidelity surety bond

Fidelity surety bonds help companies to protect themselves from employee deception and robbery. Companies dealing with large amounts of cash and expensive goods and services use these surety bonds widely. Fidelity bonds cover businesses, current, former and temporary employees, trustees, and partners.

The three types of fidelity surety bonds are:

1. Business services bond

2. Employee dishonesty bond

3. ERISA bond

4. Court surety bond

Court surety bonds protect individuals and enterprises from losing during court issues. Plaintiffs, defendants, and estate administrators use these bonds widely.

The common types of court surety bonds include:

1. Cost bond

2. Administrator bond

3. Guardianship bond

4. Attachment bond

Cost of a surety bond insurance:

The rate or premium a business pays for a surety bond includes a portion of the bond's coverage amount. However, several other factors influence the final premium amount, including:

1. The amount required by the bond

2. Security bond type

3. The credit score of the applicant

4. The financial history of the applicant


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