Many Thousands of Types of Surety Bonds

 

Surety bonds are contracts entered between three parties:

The principal, the business or individual purchasing the bond in order to guarantee future work performance.

The obligee, the entity requiring the bond.  This is often a government agency regulating industries in an effort to reduce the chance of financial loss. 

The surety, the insurance company backing the bond.  The surety provides a line of credit to be used in case the principal fails to perform in accordance with the terms of the bond and the obligee makes a claim against the bond.

Although it's not insurance as such, a surety bond is a promise and guarantee by one party to underwrite the debt, default or failure of another party.  Surety bonds ensure that services being performed by one entity for another are fully and properly completed.  If not, the party suffering damages due to the service not being completed or being done improperly, may take a claim as the obligee for full compensation within the financial limits of the bond.

How Does It Work?

Regardless of the bond specifics, it is a legal agreement among the three parties as explained above.  The principal is the individual or the business who has promised to provide professional services and is the one who pays for the bond.  The obligee is the individual for whom the service is being provided and the one who suffers if the service is performed improperly or is incomplete.  The surety is the entity who provides compensation to the obligee in the event the principal fails to perform according to the specifics of the bond.

Types of Surety Bonds

Surety bonds can fall into one of three general categories:

Commercial Bonds - used to keep working professionals from either committing fraud or using harmful business practices.  These types of bonds are typically license and permit bonds and are commonly required by the government before issuing licenses and permits.  Some common examples include sales tax bonds, auto dealer bonds and business service bonds.

Contract Bonds - used to ensure contracts are completed according to the terms of the contract.  Commonly used in the construction industry, the three most common types are Bid bonds, Performance bonds and Payment bonds.

Court Bonds - put in place to reduce risks of financial loss to persons pursuing a court action.  

It's estimated that there are more than 50,000 bonds in the U.S.