_What is a Surety Bond?
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bond A surety bond is basically a contract between three separate parties. It is, in essence, a financial guarantee by one party, known as the surety, to a different party, know as the obligee, that a third party, known as the principal, will fulfill a predefined set of responsibilities to the obligee, and that all of the state, federal, and local laws and applicable regulations will be observed. Let’s look at each of the three parties.
Principal - This is the organization owner that is required to provide the bond. This might involve a specific project (as is the case in bond contract surety bonds or it might be a provision for doing business in a specific state (as is the case with commercial surety bonds).
Obligee - (pronounced ob-li-jee) This party is the one wanting the surety bond to begin with. In the case of a construction project, this is the project owner. For commercial bonds, this is typically a municipality such as state, county, city, with states being the most popular type of obilgee in commercial surety bonds.
Surety - The surety is typically an insurance company that will issue the surety bond to the in exchange for a premium payment, which is much like a standard insurance premium. They are most concerned with determining the risk associated with the agreement. Credit worthiness of the principal is one of the main factors they use when determining the risk, and thus the premium.
A Common Question: Who Needs Surety Bonds?
While the most common class of surety bond is utilized for construction, there are numerous types of surety bonds that you can acquire for a large variety of business and industries such as medical suppliers, lending and insurance brokers, automobile dealers, health and fitness center owners, Notaries Public and more. Surety bonds can be an important part of the success of any business owner as they help protect public and private investment by providing a secure foundation.
A surety bond is not necessarily a form of insurance, but rather a financial guarantee or form of credit. A bond type is defined by what it guarantees, but essentially all bonds warrant the fulfillment of a legal obligation between three parties and are created to protect these parties from financial loss. Additionally, businesses and industries acquire surety bonds to guarantee their customers are protected in the event of contractual difficulties or default. If a valid claim is made, the surety company will either reimburse the client or make good on the contract.
Obtaining a Surety Bond
In addition to insurance companies, there are also surety companies who specialize in furnishing surety bonds. These companies use a highly thorough process to analyze the applicant’s business operations, credit history, financial strength, experience, equipment, management, work performance, references, reputation and more.
Many variables affect the cost of the surety bond, but applicants with extremely good credit will find bond rates to be affordable whereas applicants with poor credit may have to consider paying more costly rates for high risk bonds. Additionally, applicants will have to offer a collateral source as a form of security for the bond in which they are applying.
bond A surety bond is basically a contract between three separate parties. It is, in essence, a financial guarantee by one party, known as the surety, to a different party, know as the obligee, that a third party, known as the principal, will fulfill a predefined set of responsibilities to the obligee, and that all of the state, federal, and local laws and applicable regulations will be observed. Let’s look at each of the three parties.
Principal - This is the organization owner that is required to provide the bond. This might involve a specific project (as is the case in bond contract surety bonds or it might be a provision for doing business in a specific state (as is the case with commercial surety bonds).
Obligee - (pronounced ob-li-jee) This party is the one wanting the surety bond to begin with. In the case of a construction project, this is the project owner. For commercial bonds, this is typically a municipality such as state, county, city, with states being the most popular type of obilgee in commercial surety bonds.
Surety - The surety is typically an insurance company that will issue the surety bond to the in exchange for a premium payment, which is much like a standard insurance premium. They are most concerned with determining the risk associated with the agreement. Credit worthiness of the principal is one of the main factors they use when determining the risk, and thus the premium.
A Common Question: Who Needs Surety Bonds?
While the most common class of surety bond is utilized for construction, there are numerous types of surety bonds that you can acquire for a large variety of business and industries such as medical suppliers, lending and insurance brokers, automobile dealers, health and fitness center owners, Notaries Public and more. Surety bonds can be an important part of the success of any business owner as they help protect public and private investment by providing a secure foundation.
A surety bond is not necessarily a form of insurance, but rather a financial guarantee or form of credit. A bond type is defined by what it guarantees, but essentially all bonds warrant the fulfillment of a legal obligation between three parties and are created to protect these parties from financial loss. Additionally, businesses and industries acquire surety bonds to guarantee their customers are protected in the event of contractual difficulties or default. If a valid claim is made, the surety company will either reimburse the client or make good on the contract.
Obtaining a Surety Bond
In addition to insurance companies, there are also surety companies who specialize in furnishing surety bonds. These companies use a highly thorough process to analyze the applicant’s business operations, credit history, financial strength, experience, equipment, management, work performance, references, reputation and more.
Many variables affect the cost of the surety bond, but applicants with extremely good credit will find bond rates to be affordable whereas applicants with poor credit may have to consider paying more costly rates for high risk bonds. Additionally, applicants will have to offer a collateral source as a form of security for the bond in which they are applying.