There’s no doubt about it: surety bonds are one of the most misunderstood products in the industry. That’s because it’s not insurance in the traditional sense, and it’s a type of coverage that’s only required in very specific circumstances.
Whether you’re looking for a better way of talking about surety bonds to misinformed vendors or you’ve been asked to get coverage for the first time, this guide to surety bonds will help you sort through the confusion.
The Basics of Surety Bonds
As a commercial line of coverage, surety bonds create a specific performance guarantee that offsets certain business risks – such as a guarantee that a contractor will complete a project on-time and on-budget or that a liquor store will pay the taxes it collects on alcohol sales.
Instead of being an agreement between two parties like traditional policies (i.e. the insurer and the insured), surety bonds involve three parties:
- The principal who needs the bond,
- An obligee who requires it, and
- The surety that provides the coverage.
Most often, a principal is an individual or business, and an obligee is a government entity or an owner of a development project (in the case of contract bonds).
Traditional Insurance Versus Surety Bonds
While surety bonds may act like traditional insurance coverage for the obligee, it’s more like a line of credit for the principal. For example, if you get in a car accident, your auto insurance pays for the property damages on your behalf (except for the deductible) – plain and simple. You aren’t expected to reimburse the insurance company. However, if your surety company pays a claim to the obligee, you are required to reimburse them.
As a credit instrument, the principal needs to personally guarantee every dollar of risk on the bond, much like a bank loan, and the principal agrees to repay any claims and/or associated attorney’s fees.
The Types of Surety Bonds
There are two major categories of surety bonds:
- Contract (aka Construction) Surety Bonds guarantee that a contract will be fulfilled, and they are most often used in the construction industry.
- Commercial Surety Bonds guarantee some defined level of performance, and they are generally required by the government, regulatory bodies, or by some other entity.
Both of these can be broken down into a long list of subcategories – all of which are designed to minimize certain risks associated with specific industries. To learn more, visit our website.
We Can Help You with Your Surety Bond Needs
At Swarts, Manning & Associates, we provide a unique perspective on all of your commercial coverage options, and we help to determine which carrier best fits your business needs. We strive to find you the broadest coverage at the best available rate. Give us a call to get started: (833) 878-2820.
Each week, Swarts, Manning & Associates covers relevant topics for your business. Stay tuned to hear more discussions about managing your insurance and industry-specific tips.
