What Is A Surety Bond?
Although the concept of bonding has been in use for hundreds of years, the idea, though simple in some ways, can be very confusing. After all, we constantly hear the term used in context with bail bonds and even treasury bonds, but other uses can be perplexing. So exactly “What is a surety bond”?
This category of bonds fundamentally includes bonds that guarantee an obligation made by a second to a third party will be fulfilled. To be more thorough, a Surety Bond is an agreement that is issued by an organization on behalf of a second party. The organization provides insurance or a guarantee that commitments and responsibilities made by a second party to a third party will be fulfilled and completed by the organization, if by chance, the second party fails to accomplish completion or fulfillment as delineated in a contract.
Just as with any formal and legal document, the parties of the bond have ‘names’. The organization or entity that issues the bond is known as the guarantor. The second party is known as the principal. This is the party that will be performing a service of some sort. And the third party is called an ‘obligee’. The third party or the obligee is the person, company or organization that is protected by the bond. In other words, this is the beneficiary of the obligation.
The umbrella of Surety Bond includes both contract bonds and commercial bonds. Commercial bonds include license and permit bonds, union bonds, and even such things as beer bonds. Contract bonds can be broken down into categories that include performance, pay, bid, supply, maintenance, and subdivision bonds. As the name implies, contract bonds provide an insurance or guarantee on the conditions set forth in a specific contract.
Performance Surety Bonds are frequently used in the construction industry. These bonds allow contractors to obtain contracts to construct projects. Because the contractor is bonded, the person, company or organization that is hiring him to perform a particular service has a guarantee that the work will be completed, as specified in the contract.
If for some reason the contractor is unable to fulfill his obligation according to the contract, the guarantor will step in and take whatever actions necessary to correct the problem and get the project completed. Because of the protection offered by these bonds, service providers are more readily accepted as credible and trustworthy. This results in more contracts and thus more end profits for the contractor.
The consumer has the extra insurance that he is dealing with a contractor that is stable and is willing to provide a guarantee that the project will be completed per contract details. This protection adds a sense of trust and often provides the added nudge that prompts approval of a contractor. The peace of mind that the bond provides is priceless.
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