A “surety bond” is a legal tool used to guarantee that a promise will be kept. It ensures that contractual requirements will be met and work will be done according to specifications. If they are not, the bond will cover some or all of the damages that result.
The “surety bond” commits three parties to a binding contract.
First, there is the “principal,” the contractor, business or individual purchasing the “surety bond” as a way to assure others that work will be done as agreed.
Second, there is the “obligee,” the party seeking assurance that the “principal” will fully complete the task. Obligees are sometimes government agencies putting out bids, or any company or institution trying to be certain that it does not suffer financial loss at the hands of a contractor.
Third, there is the “surety,” often an insurance company, which backs the bond and makes payment to the obligee in the event that the principal fails to meet its responsibilities.
How Does a Surety Bond Work?
A contractor (the principal) usually pays an annual premium to an insurance company (the surety) in exchange for the insurer’s commitment to uphold the contractor’s promise to the organization or company that hired the contractor (the obligee). If the contractor misses a deadline or breaches some other term of a contract, the organization it contracted with can ask the insurer to cover any losses that have ensued, up to the amount of the surety bond. If the company has a valid claim, the insurance company will make payment. After making good on the bond, whether the maximum amount or a lesser sum, the insurer usually tries to recover the funds from the contractor.
When Is a Surety Bond Required?
There are a number of circumstances in which an individual or business may need to buy a surety bond.
- To receive contracts from the government or from some general contractors, a construction firm or other bidder may need to have a surety bond. Varieties of surety bond can include: “bid bonds” guaranteeing that a contractor will accept a contract if its bid is successful; “performance bonds” guaranteeing that a contractor will complete a contract according to its terms; “payment bonds,” guaranteeing that a contractor will pay subcontractors and suppliers, particularly on federal projects; and “maintenance bonds,” guaranteeing that a contractor will provide upkeep and repairs for a certain amount time.
- A surety bond such as a “license bond” or “permit bond” is sometimes a requirement for receiving certain business licenses or permits.
- A business may need a “business service bond” or “fidelity bond” to protect itself or its clients against theft or other crimes by its employees
- “Judicial bonds” may be needed by parties in civil or criminal litigation to guarantee court remedies or penalties. These can include “bail bonds.”
- “Fiduciary bonds” are sometimes needed by individuals working with probate courts. These ensure that these individuals will care for the assets of others professionally and honestly.
If you need advice relating to surety bonds, a business law attorney can help.