What are Surety Bonds?

Before defining the term “surety bond,” one must understand the meaning of surety. Surety, or guarantor, is when an individual or an organization assumes the responsibility of repaying a debt in case the debtor fails to close it or makes defaults in his/her payments.

A surety bond, thus, is a legal contract binding the debtor (or the principal), the obligee, and the surety. This bond entitles the obligee, which is the government, to file a claim against the surety, if the principal fails to keep up with the contract or law, to recover any harm incurred in recovering the debts itself.

If the claim is proven to be valid, the surety must repay the claimed amount (which should not exceed the bond amount) as compensation. However, the original claims will be obtained from the principal only.

What is the purpose of a surety bond?

The liability of repaying the loan or the original claim still lies with the principal (or the individual or organization who has been provided with the loan). However, the surety bond ensures that the surety aids the obligee for any time lost in the recovery process. Additionally, the surety claims responsibility, through the bond, to repay any financial loss or damages that may be incurred. When looking at how to get a surety bond you first need to determine what type of surety bond it is that you need.

The Different Types of Surety Bonds

The surety bonds can be broadly classified into:

♦ Construction Bond: This type is used for businesses or organizations that invest in construction projects. This ensures that the surety would pay for loss in case a project remains incomplete or fails to meet specific standards. These bonds can be further classified as –

Performance Bonds: This is a type of bid bond that protects the owner in case the project is not up to the mark or per the terms in the contract.

Supply Bonds: Also known as the payment bond or the labor & material bond, this ensures that the suppliers, workers, or contractors get their supplies, salaries, or payments related to subcontractors, respectively.

♦ Maintenance Bond: This could be for a construction project, commercial company, or practically any type of bond. With it, the party is protected from damages either during a construction project or from a commercial partnership. However, these bonds have a validity period and would cover claims during this period.

♦ Court Bond: These are bonds that any individual opts for when proceeding with claims in the court of law. This bond helps the individual from ensuring any court-related tasks are fulfilled or to avoid financial loss. These bonds could either be a judicial bond or a probate bond.

A judicial bond, ideal for plaintiffs, helps the individual from facing loss that could occur due to any court sentences or hearings.

A probate bond ensures the individual is able to complete all court-mandated duties.

♦ Commercial Bond: These, ideal for licensed professionals, ensures that the companies will comply with all the government standards, be it licensing requirements or state laws.

♦ Fidelity Bond: These reassure that a company or its customers do not face any loss due to employee theft.

♦ Completion Bond: This bond guarantees financial protection in case of unfinished projects and is ideal for construction companies.

You can learn more about the different types of surety bonds here.

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Types Of Surety Bonds