An Overview Of 3 Types Of Insurance Surety Bonds
Having a surety bond in your business dealings is a good way of winning client confidence. It guarantees the safety of their money if you're unable to fulfill your end of the deal. Additionally, it helps you get licensed and protect business assets in case of fraud, embezzlement, and employee theft.
What is a Surety Bond?
A surety bond is a written contract involving three parties, a principal, an obligee, and a surety. The principal makes an obligation to pay the obligee a certain amount of money, i.e., a loan. The surety, usually an insurance company, acts as the guarantor and commits to paying the money if the obligee defaults. In return, the obligee pays premiums to the insurance company during the execution of the contract. Most companies purchase surety bonds to meet financial and occupational licensing requirements when dealing with state or commercial contracts that involve huge sums of money.
Types of Surety Bonds
Below is an overview of the types of surety bonds you can get depending on the nature of your business.
1. Commercial surety bond
This type of surety bond involves companies that provide services to the public. It's a public interest bond that guarantees the safety of taxpayers' money if the company fails to fulfill the service. Examples of commercial surety bonds include a license and permit bond and mortgage broker bond. The former is required by government authorities when companies offering professional services apply for licenses and permits to operate. On the other hand, mortgage broker bonds protect homeowners from any fraudulent dealings from mortgage brokers. It ensures mortgage brokers comply with the law.
2. Contract surety bond
This insurance bond guarantees the completion of service by a contractor. Suppose the contractor fails to perform their obligation. In that case, the insurance company is responsible for finding another contractor to complete the project or compensating the obligee money paid to the initial contractor. A contract surety bond can be a bid, performance payment, or maintenance bond. A bid bond ensures contractors satisfy their pledges when bidding for the contract. A performance bid covers an obligee if a contractor fails to perform his duties in a contract. Payments bond guarantees contractors will pay all the people working on the project. Lastly, the maintenance bond covers any losses or repair costs resulting from the contractor's negligence.
3. Fidelity surety bond
Suppose you are dealing in a business that involves very valuable products or large sums of money, e.g., a jewelry store or financial institution. In that case, you need a fidelity surety bond in case of employee theft or dishonest dealings. This surety bond protects your customers from losing money and business assets due to employees' actions or omissions. If you own a janitorial and cleaning services company, a fidelity surety bond protects your clients from any damages or theft by your employees. Look into a surety bond insurance policy for more information.