We are all well aware how much proper insurance is important when you are running a company. While the great majority of business owners think of surety bonds as just a form of insurance, the actual purpose of this particular form is somewhat different than your typical indemnification.
The difference between a surety bond, and your usual, everyday legal binding insurance, is in the benefits that the end user is entitled to with this particular contract. It is also different from the aspect of who that end user is, and not to mention that the process behind gaining a surety bond is as well quite a different procedure than your standard ones.
So before we go any further, let’s dissect and simplify the very definition of surety bonds. After that, you will have no issues with determining whether you need one or not.
Do You Need Surety Bonds? The (Somewhat) Simple Answer
Since this type of a legal document is often seen in the construction business, we will use this example to explain why, and how a construction company should get a surety bond.
Let’s say that you are a construction contractor. Once you present your offer to your employer, and you both meet terms and reach the agreement, your employer will probably need a form of an insurance. Just in case something unpredictable happens.
Various types of insurance will protect your employer from various potential hazards. However, your proprietor can rarely insure himself from the case of you not being a diligent and a devoted worker. So if you have no intention of getting the job finished in time, or getting the job finished at all, your employer has to be prepared for that possibility. In fact, it is both yours and their requirement that you purchase a surety bond, which will serve as an insurance and as a credit in case that you fail to meet your deadlines and obligations.
In fact, even when you are bidding for a job, as a construction worker you need a bid bond just to compete at the auction. A bid bond serves as a guarantee that you are actually planning on performing this job. Otherwise, people could simply back out of the deal with no consequences whatsoever. After that, you will require a performance bond, supply bond, etc.
In simple terms, the only mission of surety bonds is to ensure that you will do your job right. In case you fail, your employer can ask for another contractor from your surety bond company, or he can claim leverage and ask for a monetary compensation.
So do you need one? If you are running a construction company, be aware that every contract valued at $150 K or more definitely needs to be backed with bonds. But from healthcare services to retail, most businesses need a surety bond in order to protect the public from their own possible failure to comply. But this doesn’t concern only companies and business transactions! Even if you’ve purchased a vehicle with irregular documentation, a bonded title can help you to claim ownership of that vehicle.
But let’s address the question of who is who in this somewhat peculiar procedure.
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How to Get Surety Bonds? The Parties Involved
A party which requires a surety bond is called The Principle. A company, or the individual who is performing services, is required to purchase a bond. By doing so, this contractor, or a company of any sort, becomes financially responsible for the possible negligence, underperformance, or any sort of failure in the place of work.
The Obligee, on the other hand, is the party which sets this requirement. Usually, you are dealing with some of the governmental agencies. And depending on your line of work, the bond that you actually need, and several other factors – you will have to deal with different agencies.
At the very end, you will have to find and contact the Surety Bond Company. This company is sort of a middle man between the governmental representatives and yourself, the contractor. This company actually curates the bond, writes it, and is eligible for answering to any possible claims that are disputing the contract.
When you look for a surety bond, you will soon find out that it is almost the same as asking for a mortgage credit. The company will review your credit score, evaluate the possibility, and determine which type of a bond is right for you.
Surety bonds exist to protect the public from irresponsible behavior of contractors and workers that have no intention of getting the job done. So to ensure that investments will be honored accordingly, and that citizens stay protected from any form of malpractice, this type of a legal agreement is quite necessary.