Surety Bonds

Written by Michael O'Brien
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What are surety bonds? What if you are an individual or organization that needs to have some kind of work done, like major construction? You get bids from several construction companies, giving you the cost and time it will take them to complete a project. You pick one based on what they tell you. Now, what assurance do you have they will complete the project as promised? This is where surety bonds come in.

Surety Bonds in a Nutshell

Think of surety bonds as a way of protecting yourself legally. If you hire an organization such as a construction company to do a job, you want to be sure they are bonded. This is your promise that they will do the job properly and in good faith. Surety companies are the ones who will be held responsible if this isn't the case.

Essentially, the surety bonds process is a three party agreement. The surety company basically makes a guarantee to the obligee/ owner (the person paying to have services rendered) that the company they are using to render such services (the principal) will live up to their promises and do a good job. The purpose is to protect the obligee from any potential financial loss if the principal somehow fails in their obligations. The surety company is the one who must ultimately pay for the mistakes of the principal should such occur.

Insurance Vs. Bonding

On the surface, the surety bonds process may seem similar to insurance. In reality, the opposite is true. An insurance policy operates under the assumption that something bad is going to happen. If or when it does, then the insurance holder will be compensated financially to make up for their loss.

The surety bonds process on the other hand operates under the assumption that nothing bad is going to happen. If you hire someone to do a job who the surety company has bonded , this is a means of assuring you they will do the job right, and that no loss will have to be compensated for. It's the surety company that suffers if this isn't the case.

Protection

Surety bonds are a way of protecting people from financial loss. This not only applies to the private sector, but to local governments as well. If a principal fails to live up to their promises and it costs the obligee, in this case a government organization, the taxpayers are the ones who will suffer. There are laws to protect public funds, and the intervention of surety companies guarantees these laws will be honored.

So who needs to be bonded? Construction companies often have to be because of all the legal obligations surrounding building contracts. If something goes wrong or a company fails to act in good faith, a huge loss occurs in money, time, and resources. Other organizations for which bonding is important are notary publics, auto dealers, and mortgage brokers, just to name a few.

Understanding Bonding

Once you understand the legal necessity of surety, the importance of the bonding process becomes very clear. Understanding what it means to you, a contractor, and a surety company is one of the first steps in undertaking a process that will require the services of a fully bonded company. A bonded company or individual will live up to their obligations no matter what. If they somehow don't, no loss to you occurs.


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