Surety bonds can be quite confusing to understand. In simple terms, they are contractual agreements between three parties; the principal, the surety and the obligee. In this contract, the surety makes a commitment to pay the obligee a specified amount of money to the obligee in the event the principal does not meet certain obligations. Surety bonds, therefore, are a protection against losses for the obligee that result from the principal’s failure to honor the terms of a contract.
In most cases, the obligee will be the city, county, state or federal government. Getting to know what type of surety bond that one requires can be a bit of a hassle. In this article, we will highlight the main types of surety bonds so you can know which one exactly you need.
Common types of surety bonds
Although there are various types of surety bonds, they all ultimately fall under three main categories; Construction/ contract bonds, license and permit bonds and court bonds.
Construction/Contract Surety Bonds
Contract bonds are a requirement for contractors who are bidding for construction in either the public or private sector. These assure the obligee that the contractor will comply with the terms of the bid and carry the project to completion.
- Bid Bonds- This surety bond is a guarantee to the owner of the project (obligee) that a contractor who successfully bids for the job will enter into a contract. It assures the project owner that the contractor will maintain a certain price for the bid and provide other bonds.
- Performance bond- This bond protects the project owner against the failure of the contractor to complete the project.
- Payment bonds- These normally work together with the performance bonds. However, rather than assure the project owner, payment bonds assure the subcontractors and other workers that they will get paid for the work that they do on the project.
License and Permit Bonds
These are the most common surety bonds used. They are required by the state or local government so that you can obtain your professional license. There are so many different types of license and permit bonds. Most businesses operating within a state will require getting one or more of these surety bonds.
- Auto-dealer bond- The actual name of this bond varies depending on the state. Essentially, this bond protects customers from fraud by the auto-dealer.
- Alcohol tax bonds- Businesses that intend to trade liquor need to obtain an alcohol tax bond beforehand. These guarantees the local government tax and other fees payments.
A court surety bond is a guarantee for the obligee against losses that arise from court proceedings. Court bonds are normally only required under certain special circumstances. For example, if you wish to appeal a case, you may need an appeal bond.
If you would like to get more information about surety bonds, get in touch with us and speak to one of our agents who will be more than willing to help.