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Surety Bonds – What Are They?

Surety bonds are financial guarantees that a principal will perform the contractual obligations and/or act in accordance with certain laws that protect the obligee.

A surety bond is an agreement between three parties:

The Obligee:

is the party requiring the bond to protect against financial loss.

The Principal:

is the party that purchases the bond to guarantee their obligation and/ or act in accordance with certain laws.

The Surety:

is usually an insurance carrier however this is the party that financially guarantees the bond.

Important information to remember about surety bonds is they are NOT insurance policies. Surety bonds are financial guarantees. What does this mean to the Principal and what are the Principal’s obligations?

The principal will be responsible for obtaining the required surety bond. This includes completing an application and upon approval paying the premium. Applications include indemnity agreement’s which require personal signatures including spousal if married. The indemnity agreements require that any loss a surety is obligated to pay will be paid by the principal – hence the financial guarantee. So what is the benefit of the surety bond if you are still required to pay a loss? The surety bond works as an extension of credit so the principal does not have to post collateral or a letter of credit which would tie up the principal’s capital. There are many different surety bonds and many different scenarios so each principal may have additional information required for underwriting.


TYPES OF BONDS:

Many different surety bonds are required to address the variety of surety bonding needs. Surety bonds fall into the following categories:

Contract Bonds – Guarantee the performance of public or private contracts. Some examples of Contract bonds are: Bid bonds, performance bonds and payment bonds.

License and Permit Bonds – are required by federal, state, or municipal governments in order to engage in certain business activities. Some examples of License and Permit bonds are: Mortgage Banker and Broker Bonds, Third Party Administrators Bonds (TPA’s), Automobile Dealer bonds, Private Investigator Bonds and Janitorial Bonds.

Public Official Bonds – guarantee the honesty and faithful performance of those people who are elected or appointed to positions in government. Some examples of professions that would require a bond are: notaries, tax collectors, court clerks and treasurers.

Court Bonds – are prescribed by statute and include judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies. Fiduciary bonds are filed in probate courts and courts that exercise equitable jurisdiction;they guarantee that persons whom such courts have entrusted with the care of others’ property will perform their specified duties faithfully. Some examples of Court bonds are: Appeal bonds, Guardianship bonds and probate bonds.

Miscellaneous Bonds – are bonds that do not fall into any of commercial surety bond classifications. Significant miscellaneous bonds include lost securities and hazardous waste bonds.

Donegan & Associates Agency LLC handles our company’s surety bonds in an extremely efficient and timely manner. Dawn answers all of our questions, is very pleasant to speak with and is very knowledgeable.

Michelle,
Acre Mortgage & Financial