A surety bond is a guarantee agreement that is issued by an entity or an organization on behalf of a second party, where the entity provides guarantee that the obligations made by the second party to a third party will be fulfilled by the entity, in case the second party fails to fulfill them.
Who are the Parties to a Surety Bond?
The entity is known as the guarantor and the second party is known as the principal. Third party is an obligee that is protected by the bond and is the beneficiary of the obligation.
How Long Have Surety Bonds Been Around?
Surety bonds have been in existence for a long time. Hundreds of years ago, these bonds were used as a means of encouraging long distance trading. The first corporate surety firm in the US was established in the year 1880 and is known as the United States Fidelity and Casualty Company of New York. According to an estimate provided by the Surety and Fidelity Association of America, approximately $3.5 billion is paid annually towards the US surety premiums.
Important Aspects of Surety Bonds
The practice of establishing surety bonds dates back hundreds of years ago, when such agreements had the role to increase the safety and efficiency of long-distance trade. Nowadays surety bonds can take various forms, play a wide range of roles and are commonly used to secure the terms of major contracts. At present, surety bonds are extensively used in the construction industry, as contractors are often obliged to provide project owners a bond that guarantees the respecting of the terms stipulated in the contract. Sometimes owners are also required to provide payment bonds to ensure that the suppliers and construction teams will receive their payment in time.
According to a series of recent studies, the construction industry in the US is a $445 billion-dollar business that includes around a million contractors, up to 70 national contractor agencies and associations, and more than 7 million workers. Elaborate market investigations recently conducted in the US have revealed that over 60,000 contractors in the construction industry failed to respect their agreements over the last 10 years. In order to prevent major financial losses and an entire succession of undesirable results, increasingly larger numbers of companies nowadays consider using surety bonds when closing major deals. In the construction industry and not only, surety bonds have a crucial role, enabling project owners to minimize serious financial risks.
What is the purpose of a Surety Bond?
Surety bonds generally establish a temporary tripartite relationship between the obligee (the secured party), the obligor (the principal) and the surety (the party that is secondarily liable). Suretyships basically require the surety to undertake the debt of another party (the principal). Although many people still confuse a surety with an insurer, they are two distinctive notions. Thus, it is very important to distinguish between suretyship and insurance agreements. For instance, a liability insurer may pay a third party on behalf of the insured, in which case the insured is under the protection of the insurer. By contrast, in case of surety bonds, the surety guarantees the performance of a certain contractor to the owner of a project, but the surety bond protects the project owner instead of the contractor.
Since they first emerged 100 years ago, surety companies in the United States have evolved considerably, nowadays delivering reliable, efficient and high-quality services. Consequently, surety bonds have diversified considerably in the last few years, addressing a wide range of risk situations. The two main categories of surety bonds available today are: contract surety bonds (provide financial security and construction assurance on construction projects by guaranteeing to the obligee that the principal will perform the work and pay subcontractors, workers and suppliers) and commercial surety bonds (guarantee performance by the principal of the obligation stipulated in the bond). These two main categories can be further separated in a wide range of subcategories.
What are the Main Categories of Surety Bonds?
There are two important categories in these bonds that include contract bonds and commercial bonds. Contract bonds provide guarantee on the terms and conditions in a specific contract. Some examples of contract surety bonds include performance, payment, bid, supply, maintenance and subdivision bonds. Some examples of commercial bonds include beer bonds, license and permit bonds and union bonds.
Surety bonds are highly popular in the construction industry where these bonds are used by contractors in order to obtain the contract to construct a project. Usually, an insurance company acts as a guarantor and takes the place of the contractor. In case, the contractor defaults with the project or is unable to complete, the guarantor steps in to take necessary corrective action to get the project completed. The insurance company might also be compelled to pay for the damages resulting due to default.
A popular subcategory of contract surety bonds is represented by bid bonds (provide financial assurance that the contractor intends to enter into the contract at the price bid and provide the required performance and pre-negotiated payment bonds), while a popular subcategory of commercial surety bonds is represented by contractor license bonds. Contractor license bonds are imposed by state law in order to obtain a license to form a certain business.
Whether you are interested in closing performance bonds, payment bonds, contractor license bonds, subdivision bonds, court bonds or various other types of surety bonds with the help of a solid surety bond-services offering agency you will be able to enter in possession of your desired surety bonds rapidly, with less effort and in exchange for competitive rates.
At Bailout Insurance Group, LLC, we will assist you with the undertaking of the surety bond that you need to get you up and running. Feel free to check out our Surety Bond Store or give us a call at (803 333-9669) with any questions that you may have, and we will be happy to assist you.