A surety bond is a contract among at least three parties:

The principal - the primary party who will be performing a contractual obligation
The obligee - the party who is the recipient of the obligation, and
The surety - who ensures that the principal's obligations will be performed.

Through this agreement, the surety agrees to uphold - for the benefit of the obligee – the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal.

There are two main categories of bond types: contract bonds and commercial bonds. Contract bonds guarantee a specific contract. Examples include performance, bid, supply, maintenance and subdivision bonds. Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc.

Suretyship bonds originated hundreds of years ago as a mechanism through which trade over long distance could be encouraged. They are frequently used in the construction industry: in order to obtain a contract to build the project, the general contractor (and often the sub-contractors as well) must provide the owner a bond for its performance of the terms of the contract. Conversely, owners and contractors may also provide payment bonds to ensure that subcontractors and suppliers are paid for work done.

Under the Miller Act, payment and performance bonds are required for general contractors on all U.S. federal government construction projects where the contract price exceeds $100,000.00.

Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust. A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly. If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually aninsurance company whose solvency is verified by private audit, governmental regulation, or both.

The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.

A bail bond is a type of surety bond used to secure the release from custody of a person charged with a criminal offense. Under such a contract, the principal is the accused, the obligee is the government, and the surety is the bail bondsman.

Commercial Bonds

A general classification of bonds that refers to all bonds other than contract and performance bonds.Commercial bonds cover obligations typically required by law or regulation. Each bond is unique to the circumstances at hand.

Included within the Commercial Bond category are:

License and Permit Bonds

A term used to refer to bonds, which are required to obtain a license or a permit in any city, county, or state. These bonds guarantee whatever the underlying statute, state law, municipal ordinance, or regulation requires. They may be required for a number of reasons, for example the payment of certain taxes and fees and providing consumer protection as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.

Some bond types included with License and Permit Bonds:*

  • Blue Sky Bond (Securities Dealer or Securities Broker)
    The bond guarantees compliance with state statutes and indemnifies the purchasers of securities against loss due to false representations made by the dealer or any of the salespeople as an inducement to purchase securities.
  • Collection Agency Bond
    This bond guarantees that the Principal will operate according to state statutes and the Fair Credit Reporting Act regarding this type of business and the proper remittance of funds collected by the Principal on behalf of any customers.
  • Compliance Gaurantee License Bonds (Plumbers, Electrician, Building Contractors, HVAC, etc)
    These bonds are usually required by a governmental entity and guarantee that the Principal will conduct business in accordance with the privilege granted by a particular license and he/she will comply with the governmental ordinances. Ultimately, these bonds protect the public from incompetency and hold the governmental entity harmless.
  • Grain Warehouse Bond (State Grain Storage and Grain Buyers/Dealers, Federal Grain Storage/Buyers Bond)
    The Storage Bond is a Faithful Performance/Financial Guarantee obligation guaranteeing the type, grade, and net quantity of grain called for by a farmer's storage receipt will be in the elevator when the farmer decides to sell it. Bond penalty varies by state and is based on bushel capacity of the warehouse. The Buyer/Dealers Bond guarantees payment by buyer/dealer to the seller of grain.
  • ICC Brokers Bond (Transportation Broker)
    The ICC Broker is a person who arranges the transportation of merchandise by Common Carrier for a Shipper.The bond guarantees that the Carrier and the Shipper will receive goods and all monies due tothem.
  • License Bond (Financial Guarantee)
    This type of bond guarantees payment of a sum of money required of the Principal in connection with his line of business pursuant to the license granted him/her.
  • License Permit Bonds (Blasting, Demolition, Encroachment, Fumigation, Highway Access, House Movers, Oversize/Overweight, Right of Way, Sidewalk or Street Opening or Obstruction, Weighmaster)
    These bonds guarantee compliance with requirements and restrictions pursuant to a license granted and also protects the general public against monetary loss, physical damage or bodily harm. The bond is required for a specific activity the Principal wishes to engage in and usually holds the Obligee harmless.
  • Mortgage Broker (Loan Broker)
    These bonds run to the State for the benefit of any person injured by wrongful acts, default, fraud or misrepresentation of the Principal. It guarantees the Principal will faithfully perform mortgage commitments made and account for any funds received in its capacity of mortgage broker.
  • Motor Vehicle Dealers Bond (New or Used Car Dealers)
    This bond protects the public from any losses incurred by fraudulent practices, violations or misrepresentations of the auto dealer or its sales force. The bond differs by state but it may guarantee good title to the vehicle, fraudulent turning back of odometers, remittance of sales tax to states, warranties, etc.
  • Private School Bond
    This bond guarantees that the Principal will comply with the state's regulations pertaining to curriculum, qualifications of the teachers, etc. The bond also guarantees that the school will return any advance tuition payments if they are unable to provide the services.
  • Tax Bonds (Tobacco, Fuel, Liquor, Sales, Amusement, etc)
    These bonds guarantee the proper accounting for and remittance of taxes and other fees due the government on items handled by them in the normal course of business. Taxes are usually paid by someone else to the Principal for items purchased.

Public Official Bonds

A type of bond that guarantees a public official will act with honesty and/or faithful performance.These bonds are required by statutes and ordinances.

Court Bonds

A general term referring to bonds required in some action of law.

Utility Bonds

Bond guarantees that principal will pay utility bills to the utility company in a timely manner.

What are Fidelity Bonds?

The Surety Company Dishonesty Bond is employee fidelity coverage to protect the employer against a dishonest act by an employee. For the employer, the Dishonesty/Fidelity Bond provides protection for a very reasonable premium. For the agency, the bond can be an excellent door opening tool, leading to additional business. The Dishonesty/Fidelity Bond is easy to write, without all the complicated rate modifications and employee classifications other companies require.

What is the difference between the surety company’s Form A and Form B Coverage?

  • Form A
    The Form A bond is standard fidelity coverage. It is designed to cover professional and business offices such as accountants, physicians, dentists, attorneys, architects and realtors. The Form A coverage canalso be used to cover the officers only of nonprofit organizations. This is a blanket position bond covering each employee to the penalty amount. * The Form A bond provides coverage exclusively tothe employer, to protect against a dishonest act by an employee. A dishonest act by the employer would not be covered.
  • Form B
    The Surety Company developed the Form B bond to provide employee fidelity coverage for businesses with more exposure. This form is used for businesses such as cafes, restaurants and retail operations. The Form B coverage is also used to cover nonprofit organizations when the employees of the organization are to be covered, along with the officers. To protect against unjustifiable allegations or charges, the employee must be convicted of the dishonest act before coverage would apply .* * This is also blanket position coverage.

    The Form B bond provides coverage to the employer to protect- against a dishonest act by an employee, plus another feature known as subscriber liability. Under the Form B bond, the subscribers to a service re also protected against a dishonest act by an employee; however, it is important to note that a subscriber to a service does not have a direct right of recovery under Form B coverage. The Company only agrees to indemnify the insured for any loss of money or other property which it sustains or for which it becomes liable to any customer or subscriber through any fraudulent or dishonest act committed by its employees.

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