A surety bond is a legal contract that ensures that one party fulfills its contracted obligations to another party. If one of the parties fails to meet their obligations, the other party is compensated. These bonds are also used to make sure that the government contracts are completed on time, make sure the losses are covered due to a court case, and to protect an employer against an employee’s dishonesty.
Who do the Bonds Protect?
In simple terms, surety bonds protect government institutions and customers against financial loss in case a business or company does not fulfill its obligations. When you are functioning in a business, your client or customer’s trust is what builds relationships and your company’s reputation.
Therefore, when you protect your client’s trust, you are also protecting your business. Customers prefer working with businesses that offer some form of guarantee that is legally binding. Surety bonds are a common way of doing this.
Unlike an insurance policy that protects the one who buys the insurance, a surety bond does not protect the one who is buying the bond. It is quite the opposite in fact. It is written to protect the rights of third parties like your client. If the party must face financial damage due to the principal’s neglect of the obligations, a claim against the bond can be made. The claim is investigated by the obligee and if found valid, the principal and the insurance company will be liable to pay the damages.
Who are the Surety Bonds Parties?
A surety bond is a three-party contract created to ensure performance, payment and proper compliance of the obligations:
- The Principal – this is the party that buys a surety bond. They provide the goods or services and need a surety bond to guarantee their promised timely delivery and work performance.
- The Obligee – this is the party who requests the bond from the Principal to ensure they will fulfill their contract obligations.
- The Surety – this is the party that issues the bond and will pay the Obligee if the Principal does not fulfill their contracted obligations.
Surety bonds are considered a form of insurance, but they are more like a line of credit. In all surety bonds, the Principal is expected to pay the surety back in case there is a claim against the bond.
These bonds are legally required for the functioning of many businesses and are considered a part of standard best practices. The main reason behind it is that these bonds offer a quick and easy way of settling many claims.
Bond vs. Surety – What is the Difference?
The main difference between these two is that a surety refers to the entity that issues the bond and ensures that the obligations will be met. The bond specifies the obligations that are guaranteed by the surety. The obligations that are ensured by the bond are outlined by the oblige who requires or demands the bond.
Types of Surety Bonds
Each State has different surety bond requirements, and there are many types of surety bonds for different industries or applications. Here are some common types of surety bonds:
Contract Surety Bond
A Contract Surety Bond is used to ensure that the contractor who is the principal in this case will follow all of their obligations. These bonds are used in construction industries and in case the contractor fails to fulfill their duties, the surety company must arrange for another contractor to complete the project. Or they must reimburse the owner to cover the financial loss.
Commercial Surety Bond
A Commercial Surety Bond is used to protect public interests and is required by governmental institutions. Usually, licensed businesses obtain these bonds and guarantee that they are working in the best interests of the general public and must follow all laws and regulations. The bond principals in this case are the licensed contractors, automobile dealers, liquor stores, notaries, and other licensed professionals.
Fidelity Surety Bond
Fidelity Surety Bonds are bought by companies to protect themselves against theft and employee dishonesty. These bonds are important for companies and businesses that deal with large amounts of cash and function in the expensive items industry. For example, credit unions get these bonds to cover themselves in case their employee steals money in the name of a false loan. These bonds cover businesses and professionals like former, current, temporary employees, trustees, directors and business partners.
Court Surety Bond
Court Surety Bonds protect people and companies from the loss that may occur because of a court case. These binds are utilized by both defendants and plaintiffs and by the estate administrators.
Who Buys Surety Bonds?
Surety Bonds are purchased by businesses that work in a wide range of industries. Usually, these bonds are purchased as a part of satisfying professional licensing requirements that are outlined by federal, state or law government or authorities. The party that requires these bonds are the ‘obligees’ and each of these obligees has a unique bond that states the terms of the contract and often, they include references from state laws and statutes.
These bonds are required in all states and they guarantee the compliance of the financial terms that are related to business licensing. A business guarantees its commitment and ethical obligations with surety bonds. Here are some businesses or professionals that may require these bonds;
- Construction contractors
- Auto dealers
- Public insurance adjusters
- Credit repair service/providers
- Private investigators
- Mortgage brokers or loan originators
- Other professional licenses
What is the Process to Obtain a Surety Bond?
Many businesses owners do not know what a surety bond is until they are asked to post one. Before purchasing a bond it’s important to understand the type of bond you need and its specific requirements.
Directly contacting a reputable agency that sells surety bonds can help inform and guide you so you can purchase the right bond for your needs. Such agencies are knowledgeable and can offer the best and competitive options and guide you and help you obtain your required kind of bond.
The surety bond application will require information about the business and its owners such as names, addresses and the total years they have been in business. Additional information requested can be the employer’s identification numbers, social security numbers, and professional license numbers. The underwriters who review these forms check the history of the business and the people involved.
Premiums can vary depending on the strength of a business. Businesses may use two techniques and get a lower premium. These techniques include using collateral or adding a co-signer. Collateral can be cash or an irrevocable letter of credit from a bank that is deposited with the carrier and is drawn if there is a claim against the bond. Having a co-signer who has a higher credit history than the owners can give the underwriter an opportunity to offer a lower surety bond rate.
Once the application is reviewed, it will get a risk category rating, and the premium will be set that is based on the surety company’s rate fillings. The premium is the amount to be paid for the surety bond.
How much Time is Required to Get a Surety Bond?
It can take 24 hours or less to get a surety bond. Applicants get approved on the same day they submit the form and can get it bound the very next day. Some surety bond companies have an effortless online quote request forms that take a few minutes for the applicant to fill out and submit. There can be approval delays if there is additional information needed, lack of expertise, weaker financial means or the projects to be completed are outside of the normal geographical location of the business.
When most of the underwriting is automated this helps save time and effort and can provide a quick approval. Other than the basic information, some applicants may need to provide some additional details which can be sent to the agent via email.
It’s important to find a surety company that has a deep understanding about your specific industry and business needs so they can find the best surety bonds for your required needs.
About the White Eagle Coalition
The White Eagle Coalition empowers and enables cannabis businesses and entrepreneurs to enjoy industry-tailored insurance, banking, consulting, and legal services nationwide. UNITY leads to strength, and strength in numbers enables business owners to implement change and fully achieve the vision of the cannabis industry.
About White Eagle Insurance Solutions
White Eagle Insurance Solutions is a revolutionary insurance agency with a single mission: to provide Insurance Products to the Cannabis Industry. We will help you manage the risk, protect your assets, and secure your investment. White Eagle also offers surety bonds for cannabis businesses.