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Help Me Out: Everything You Need to Know About How to Get a Surety Bond

May 20, 2019

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The surety industry has been steadily growing. Statistics show that the direct premiums increased from $5.9 billion to $6.2 billion in 2017. This figure has more than doubled over two past decades.

Although surety bonds are still not known to many people, the figures show that more people are now choosing the bonds, mainly because they guarantee that a particular payment will be paid.

In this article, we will discuss how to get a surety bond and how they are beneficial to the involved parties. By the end of this article, you should have an insight into how you can protect yourself or your business by using a surety bond.

What Is a Surety Bond?

A surety bond is a legal agreement between three main parties: the principal, surety, and the obligee. The primary aim of the bond is to guarantee that the principal will fulfill the predetermined obligations to the obligee.

The obligee is the party which needs the surety as the protection, while the surety is the insurance company which backs up the surety bond. A surety is the insurance firm which backs up the full bond amount.

How Do Surety Bonds Work?

Since surety bonds transfer risks, they are designed to protect both private and public interests from the third party actions.

In simpler terms, they act as a form of insurance which benefits one party and is financed by the third party. For instance, when a general contractor undertakes a commercial construction project with the project owner, he will be required to buy a contract surety bond.

The bond protects the owner of the project against any failure from the general contractor to complete the project as specified. When the failure occurs, the owner of the project can file a claim against the contract surety bond. The surety bond company then finances the expenses on behalf of the general contractor.

Once the damages are paid, the general contractor repays the surety bond company within the specified period.

Types of Surety Bonds

There are many types of surety bonds because all obligations or contracts can be bonded. However, there are four main types, which include contract surety bonds, court surety bonds, commercial surety bonds, and the fidelity surety bonds.

Contract Surety Bond

This bond is used to guarantee that a contractor will follow the laid specifications in a construction project. The bond ensures that the principal contractor will carry out the work as agreed and will finance all the necessary subcontractors, suppliers, and materials.

Commercial Surety Bond

A commercial bond is used to protect the public interests and those that are mandated by the federal agencies.

Fidelity Surety Bond

A fidelity bond protects companies against employee malpractices, especially those who handle valuable assets and cash. It is also used to protect against the loss of clients’ money, personal supplies, and equipment.

Fidelity bonds protect a company from any loss that occurs as a result of fraudulent activities from the employees.

Courts Surety Bond

An attorney or similar personnel require this type of bond before court proceedings. The bond is used to guarantee any payment of lawyer fees and the other costs which arise once the final decision is made.

Which Type of Situations/ Businesses Require Surety Bonds?

You might require a surety bond if you are an auto dealer, a freight broker, mortgage broker, or a notary public. However, there are other types of businesses which require the business owners to have a surety bond.

They include cleaning services firms, house painting companies, or pet sitting companies. The bond helps to increase customers’ trust in their business.

How Much Do Surety Bonds Cost?

There is no specific answer because of the price of the bond changes depending on the purpose and the type of the bond. It is also determined by the risk involved in the bond and risk associated with the services or programs offered.

Most of them range between $50 and $150, but the construction contract bonds can extend to more than $5,000.

How to Get a Surety Bond

You must provide the following information to qualify for a surety bond:

Company financial performance- provide the past three years’ bank statements, including the firm’s liquid assets.

Existing business lines of credit - the higher lines of credits are required since they reduce the financial distress during the project.

Industry experience - the past working experience of both the owner and the company, including on similar projects, is required.

Pros and Cons of Surety Bonds

Pros

Surety bonds encourage contractors to work within the specified timeframe and guarantee the quality of materials and workmanship. The subcontractors also get an assurance that they will be paid after completing the project.

Additionally, the bonds boost the clients’ confidence since they provide a financial guarantee that the project will be completed and delivered according to their expectations.

Cons

False claims may be paid out, especially when a proper investigation is not done. This means that you can easily lose your money. The surety bonds requirements are also high.

The client must provide 100% collateral, and this requirement cuts many people off. Lastly, surety bonds are associated with increased bankruptcy, since reducing the working capital increases the chances of defaulting. You can view examples of false claims here.

What Happens If I Default My Bond?

Defaulting a surety bond is a violation of terms. When it happens, a claim is filed against the bond, and a thorough investigation is conducted by the surety claims departments.

The principal is given the chance to take legal action and satisfy the claims of the original claim if they are indeed legitimate. However, when the principal does not meet the initial agreement requirements, the obligee gets a surety settlement and the principal faces collection proceedings.

Getting Surety Bonds

A surety bond protects the interests of the obligee. It is issued by insurance companies and surety bond brokers as well. Before you select one, carry out detailed research on how to get a surety bond, as well as the agents offering it.

Also, check out the US Department of Treasury to find out the approved companies that issue surety bonds for federal projects.

Contact us and view our shows to strengthen your faith as you continue your search for the best surety bonds and providers.