You need a surety bond, but what kind of bond do you need? With over 25,000 bond types getting the right bond can be a tough task. Surety bonds are three-way agreements where loss is not expected and premiums generally pay for pre-qualification services and the cost of underwriting. A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation.
For example, most municipalities and governmental agencies require construction bonds on public works projects. A contractor must obtain a payment bond that guarantees subcontractors and other workers will be paid in the unlikely event the contractor defaults. The surety bond insulates the municipality against financial harm. But it is not insurance. If a subcontract issues a claim against that payment bond, the surety company ensures the maligned party is compensated by the contractor who purchased the bond.
License and Permit Bonds
Most surety bonds fall under license and permit bonds. These bonds are generally required to obtain a license or permit in any city, county, or state.
License and Permit Bonds apply to many different professionals and businesses that we encounter every day as consumers. The License Bond is used to ensure that a professional service provider is qualified to do business and will abide by whatever state law, statute, ordinance, or regulation requires. A license and permit surety bond is an important part of the entire free market system. These bonds are designed to protect consumers by ensuring that businesses perform their jobs according to the rules and regulations set forth by local, state and federal governments. A license and permit bond provides your consumers with an extra vote of confidence. They will know you are qualified and have a license in good standing with the state. Having a license and permit bond also assures your consumers that they are working with an upstanding and ethical business or individual who has taken the time to guarantee their work with a surety bond.
A fidelity bond is a bond which indemnifies an employer against financial loss due to the dishonesty of an employee or protect a business from certain types of damage caused by employees. This type of protection is not mandatory in most states, but it does shield a company from expenses that are not covered by other policies. Fidelity is really more like insurance than a bond.
There are several types of fidelity bonds, each providing specific coverage:
Employee Dishonesty: Employee Dishonesty is a generic term describing fidelity bond coverage guaranteeing against loss caused by dishonest officers or employees of a commercial firm or by dishonest public officials or employees.
Business Services (fidelity) Bonds: If you have employees working in a customer’s premise, this type of bond will provide coverage for employees’ fraudulent or dishonesty acts. For example, if you have a cleaning service, this bond will reimburse you if your employee steals from a customer. You can then use the proceeds to reimburse your customer. In order to protect you and employees against unjustified allegations of dishonesty, the employee must be convicted of the alleged dishonesty before coverage would typically apply.
Commercial Crime Bonds: Commercial Crime covers more than just employees, and it is similar to insurance in that the policy owner will likely have to pay a deductible to recoup any loss. The seven basic agreements for a crime policy are:
- Employee Theft
- Forgery or Alteration
- Inside the Premise – Theft of Money or Securities
- Inside the Premises – Robbery or Burglary of Other Property
- Outside the Premises
- Computer Fraud
- Money Orders and Counterfeit Paper Currency
A contract surety bond is a bond that typically deals with the performance at some or all stages of a construction project to ensure the contractor will work according to the instructions laid out in the contract or the bonding company will be required to pay the contract owner. Any federal government construction project that exceeds $100,000 is required to have a performance bond. Chances are a project owner has told you that you need a surety bond to be a contractor on their project. There are several different types of contract surety bonds to familiarize yourself with before you enter into a contract. Contract bonds are sometimes referred to as Construction Bond.
There are seven different types of contract bonds:
Assures the owner of the project that the bidder will do the job if chosen. This bond promotes serious bids and guarantees the owner that the bidder is financially able to accept the job.
This bond guarantees that the work done by a contractor is without defects for a specified amount of time after completion.
In the event that the contractor fails to pay the suppliers, subcontractors, and workers, this bond ensures that they will be compensated.
The performance bond ensures that the contractor will complete the project. In the event that the contractor does not satisfactorily complete the project, the performance bond guarantees no financial loss to the project owner.
Site Improvement Bond
This bond ensures that mandatory improvements will be made to a property. Site improvement bonds are much like subdivision bonds except for existing structures.
The subdivision bond is similar to the site improvement bonds except for new structures. This bond guarantees to city or state that mandatory improvements will be made to their property.
The supply bond is a contract between supplier and consumer that ensures that the supplier will provide materials as defined in the contract.
Court & Probate Bonds
Court and Probate Bonds are commonly used as a financial guaranty to the court in a variety of proceedings. Court bonds guarantee that parties are protected from financial loss stemming from a court proceeding. A probate bond is used to protect the deceased and beneficiaries from fraud or embezzlement of the estate or assets. These bonds are often referred to as estate or executor bonds.
Two other types of court bonds include guardianship bonds and appeal bonds. Appeal bonds typically require 100% collateral and are required by the court prior to any appeal. A Guardianship bond, also called a custodian bond, guarantees that the legal guardian of a minor or handicapped
An Importer Bond, or Activity Code 1, is the most common type of Customs Bond. This bond allows an importer of merchandise to bring their goods into the USA. The bond guarantees that the entry paperwork is filed correctly by the principal and the appropriate amount of duties, taxes and fees will be paid by the principal to Customs. In addition, the Importer Bond satisfies the requirement of airport security and ISF filings.
An Importer Bond can be issued as a continuous bond, or as a single entry bond. Currently, the minimum bond amount required by U.S. Customs is $50,000.
There’s a whole world of bonds that don’t fall into the traditional categories of contract, court, or license and permit bonds. Some miscellaneous bonds are legally mandatory while others may be more for private agreements between businesses and consumers. Popular miscellaneous bonds include ARC bonds for travel agents and utility bonds, which guarantee payment of utility bills. Any bond that doesn’t fit into one of the categories above will be categorized as a miscellaneous bond. If you do not see your bond listed anywhere, contact one of our specialists to find out if we can help you.