Surety bonds are one of the most misunderstood products in the industry. Unlike traditional insurance, surety bonds operate in specific circumstances and involve a unique three-party agreement. Whether you need to explain surety bonds to a vendor or are seeking coverage for the first time, this guide will help clarify the basics.
The Basics of Surety Bonds
Surety bonds provide a performance guarantee to offset business risks. For example:
- Ensuring a contractor completes a project on time and within budget.
- Guaranteeing a liquor store pays taxes collected on alcohol sales.
Unlike traditional insurance (an agreement between two parties), surety bonds involve three parties:
- Principal: The individual or business needing the bond.
- Obligee: The party requiring the bond (often a government entity or project owner).
- Surety: The company providing the bond.
Traditional Insurance Versus Surety Bonds
Surety bonds differ from insurance in how claims are handled:
- Insurance Example: If you have a car accident, your auto insurance pays the damages, and you’re not required to reimburse the insurer.
- Surety Bond Example: If a claim is made against your bond, the surety pays the obligee on your behalf. However, you must reimburse the surety for the amount paid, including legal fees.
Surety bonds function as a credit instrument. The principal personally guarantees every dollar of risk, much like a bank loan.
Types of Surety Bonds
Surety bonds fall into two main categories:
- Contract (Construction) Surety Bonds:
- Guarantee a contract will be fulfilled.
- Primarily used in the construction industry.
- Commercial Surety Bonds:
- Ensure a defined level of performance.
- Often required by government entities, regulatory bodies, or other organizations.
Both categories include a range of subcategories tailored to specific industries and risks.
We Can Help You with Your Surety Bond Needs
At Swarts, Manning & Associates, we guide businesses through their commercial coverage options to find the best fit for their needs. Contact us today for a consultation at (833) 878-2820.
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