Tuesday, June 25, 2013

About Surety Bonds

A surety bond is a particular type of bond that involves three different parties.  These are the principal (the entity being secured against default), the obligee (the entity who has the rights to the money or service owed), and the surety (the entity promising to shoulder the liability in case the principal defaults.

There is a wide range of circumstances or situations where this type of bond can be used.  Basically, a surety bond is used every time a group or an individual is expected to perform something, and an additional assurance of compliance is required.

How It Works

The principal signs an agreement with a surety company (normally an insurance underwriter or company like Swift Bonds) that makes a promise to reimburse the surety in case the obligee defaults or fails to pay.  In this case, the surety gives the obligee the agreed amount.  This then results to a legal obligation of the principal to reimburse the company.  This may include all expenses and losses incurred by the surety in relation to the case.

Since the insurer is a lender, it acquires the same rights in recovering its losses from the principal like what any lender has; and this is unlike a typical insurance transaction where an insurance company has significantly less options as far as legal recourse is concerned.

Types of Surety Bonds

There are many types of this bond including court bonds, contract bonds, license bonds, and bail bonds.  Swiftbonds does not write any court or bail bonds.  We focus solely on bonds for contractors.

Contract bonds – required of a contractor who is obliged to do a particular building or maintenance job. The contract may stipulate various specifications, timeframe for completion, and maximum cost, the surety may be required to appropriately fulfill the contract.

Court bonds – usually court-required prior to a principal’s attempts to file an injunction or claim, or an appeal. If the principal fails, they may be required by the court to shoulder the court costs or even a fine in case of wrongful filing.

Bail bonds – This is one of the most popular types of surety bond, although one that a lot of banks and insurance companies want nothing to do with primarily because of its notoriously high default rate. This basically requires the principal’s appearance at a set court date, and usually costs higher since only a few specialists are willing to issue such a bond.

License bonds – usually required for start up businesses or when acquiring a new kind of license for an already existing business.  In this case, the principal is the owner getting a surety for compliance with all the licensing requirements.  The local government or the state is the obligee issuing the license, and gets paid in case the principal does not act in accordance with the licensing requirements.

There are other types of surety bonds other than those mentioned above.  These include permit bonds (similar to license bonds), public official bonds (to make sure that the elected or appointed official will act lawfully), and probate bonds (for executors handling the assets of a minor or an estate).

About Surety Bonds

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