When would a surety bond be necessary?
A surety bond is an unusual form of insurance in that one person or organization pays for it, while another receives the benefit. It’s easier to understand with an example. Imagine a contractor is building a new office building for a government agency. The agency naturally wants a guarantee that the taxpayer won’t be left paying out of pocket if the contractor fails to deliver the offices as promised.
How do surety bonds work?
The contractor pays a premium to an insurer to purchase the surety bond. The insurer then pays the necessary compensation to the agency if the contractor fails to deliver. The big difference between this and ordinary insurance is that the insurer can and will go after the contractor to get this money back. The point of the surety bond is that the agency gets the assurance that it won’t have to chase after the money itself. Here are some examples of the different types of surety bonds:
- Bid Bonds
- Court Bonds
- License and Permit Bonds
- Fiduciary Bonds
- Miscellaneous Bonds
- Payment Bonds
- Performance Bonds
- Public Official Bonds
- Warranty Bonds
The difference between the principal and the obligee.
While government agencies commonly insist on a bond, it can work with any two organizations. The one that purchases the bond is the principal, while the one that gets any payout is the obligee. If the principal fails to perform the work they are bound to complete, the obligee is compensated for financial loss or may be able to get another contractor to complete the project.
If there’s anything else you need to know about surety bonds, contact us to learn more.