Surety Bond: Its Definition And procedure
A surety bond is a tripartite agreement. The parties to a surety bond include:
• The Principal –The person or company posting the bond.
• The Obligee – The person or entity requiring the bond, usually a government agency or a client.
• The Surety – The company that bonds are being issued by, providing assurance of financial protection if the principal happens to default on their obligations.
Surety Bonds Versus Insurance
A surety bond is created for the benefit of the obligee, while insurance functions to give payment for the loss it has insured. In the event of a principal defaulting, the surety would pay the obligee, but the surety would come after the principal for recovery. Visit website for more information on how surety bonds work and the differences between them and insurance.
Types Of Surety Bonds
1. Contract Bonds – This broadly categorizes bonds used in construction to ensure contractors meet project specifications, such as bid bonds and performance bonds.
2. Commercial Bonds – Required for business licensing and allows the public to ensure compliance, such as auto dealer bonds, freight broker bonds, etc.
3. Court Bonds – Ensure compliance with judicial mandates, such as bail bonds and probate bonds.
4. Fidelity Bonds – Protect companies from fraud by employees, for instance, employee dishonesty bonds.
Surety Bond Application
1. Apply – Fill out an application that details about your business.
2. Approval – The surety assesses your application considering credit and risk level.
3. Quote – Once you have been approved, you are given a price proposal.
4. Issuance – After payment is completed, your bond is issued, often within 24 hours.
Finding the Right Provider
Consider financial stability, industry experience, and customer service levels of the surety bond company. The option to apply online provides a rapid, hassle-free process compared to the traditional method.
Surety Bond Premiums & Costs
The factors affecting the price include:
• Type Of Bond – The higher risk, the more expensive the bond.
• Bond Amount – Larger bonds mean higher premiums.
• Credit Score – The better the credit, the better the rate.
Most premiums range from 1% to 15% of the bond amount. You can reduce the cost by improving your credit score and by working with a good agency.
FAQ
Can I get a surety bond with bad credit?
Yes, but expect higher premiums. Some providers have special programs for high-risk applicants that might offer better rates.
How long does it take to get a surety bond?
Generally, almost any bond will be issued within 24 hours after the approval.
How long are surety bonds good for?
Most bonds are issued for a one-year term with the possibility of renewal, but some might run concurrently with the contract.
Is surety bond premium refundable?
No, they are considered non-refundable.
What happens in case a claim is filed?
Upon a valid claim made by the obligee, the surety will in turn pay the obligee. The principal will have to reimburse the surety fully.
