SURETY BOND

A Surety Bond (Surety) is a promise to pay or indemnify one party (the Obligee) a certain amount if a second party (the Principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the Obligee against losses resulting from the Principal's failure to meet the obligation.

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A contractual relationship whereby one party-the Surety-agrees to pay the principal's debt or perform his or her obligation in case of the default by the Principal.

A surety bond is defined as a contract among at least three parties:

• The obligee - the party who is the recipient of an obligation,
• The principal - the primary party who will be performing the contractual obligation,
• The surety - who assures the obligee that the principal can perform the task.

Surety Bonds in some cases are called "Bank Guaranties" in English and "Caution" in French.

Through a surety bond, the surety agrees to uphold - for the benefit of the obligee - the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guaranty performance and completion per the terms of the agreement.

The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.

If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both.

A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly.

Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.

The Insurance commission is responsible for regulating corporate surety activities within their jurisdictions. The Insurance commission also license and regulate brokers or agents who sell the bonds.

Type of Surety Bonds

BIDDER'S BOND - it is a guaranty that a contractor will enter into a contract if owner awarded the bid.

SURETY BOND - a guaranty in a form of surety bond that a general contractor (Principal) will adhere to the provisions of a contract.

PERFORMANCE BOND - a kind of bond that guarantees a contractor will perform the work as specified by the contract.

GUARANTY PAYMENT BOND - that the contractor will pay for services, particularly subcontractors and materials and particularly for federal projects where a mechanic's lien is not available.

MAINTENANCE BOND - a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are subdivision and supply bonds. Bonds are typically required for federal government projects by the

Commercial surety bonds

Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.


License and permit bonds

License and permit bonds are required by certain federal, state, or municipal governments as prerequisites to receiving a license or permit to engage in certain business activities. These bonds function as a guaranty from a Surety to a government and its constituents (Obligee) that a company (Principal) will comply with an underlying statute, state law, municipal ordinance, or regulation.

Specific examples include:

• Contractor's license bonds, which assure that a contractor (such as a plumber, electrician, or general contractor) complies with laws relating to his field. In the United States, bonding requirements may be at federal, state, or local level.
• Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import duties and taxes.
• Tax bonds, which assure that a business owner will comply with laws relating to the remittance of sales or other taxes.
• Reclamation and environmental protection bonds
• Broker's bonds, including Insurance, Mortgage, and Title Agency bonds
• ERISA (Employee Retirement Income Security Act) bonds
• Motor vehicle dealer bonds
• Money transmitter bonds
• Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.

Court bonds

Court bonds are those bonds prescribed by statute and relate to the courts. They are further broken down into 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, or probate, bonds are filed in probate courts and courts that exercise equitable jurisdiction; they guaranty that persons whom such courts have entrusted with the care of others' property will perform their specified duties faithfully.

Examples of judicial bonds include appeal bonds, supersedeas bonds, attachment bonds, replevin bonds, injunction bonds, Mechanic's lien bonds, and bail bonds. Examples of fiduciary bonds include administrator, guardian, and trustee bonds.


Public official bonds

Public official bonds guaranty the honesty and faithful performance of those people who are elected or appointed to positions of public trust. Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, law enforcement officers, and Credit Union volunteers.


Miscellaneous bonds

Miscellaneous bonds are those that do not fit well under the other commercial surety bond classifications. They often support private relationships and unique business needs. Examples of significant miscellaneous bonds include: lost securities bonds, hazardous waste removal bonds, credit enhancement financial guaranty bonds, self-insured workers compensation guaranty bonds, and wage and welfare/fringe benefit (Union) bonds.


Fidelity bonds

Fidelity bonds, also known as employee dishonesty coverage, cover theft of an employer's property by its own employees. Though referred to as bonds, fidelity coverage functions as a traditional insurance policy rather than a surety bond.