A surety bond is a guarantee to pay if a party fails to meet an obligation, such as the terms of a contract. Surety bonds are used to guarantee payment in case of default. They protect against losses if a principal does not meet a certain obligation. A surety is considered to be a contract with at least three parties. These include the obligee, the principal, and the surety. The obligee is the party receiving the obligation. The principal is the party primarily responsible for performing the contract and the surety guarantees to the obligee that the contract will be met.
In Europe, a surety bond can be issued by a bank or a surety company. The bonds issued by banks are called Bank Guaranties. If they bond is issued by a surety company they are called surety bonds. These bonds pay cash up to the limit of the guaranty if a principal defaults on their obligations. A principal can pay a fee, usually paid annually, which allows them to purchase surety credit.
If there is a claim, the surety company will conduct an investigation. If the claim is valid, the surety company pays and then gets reimbursed for the amount of the claim and any legal fees.
The solvency of the underwriter of a surety bond is usually verified by governmental regulation, a private audit or even both.
One of the primary elements of a surety bond is the penal sum. This is the maximum amount of money that a surety will pay if a principal defaults. This sum is determined by how risky a surety considers a contract and a fee is charged depending upon the amount of risk.
Other situations can also call for a surety bond. They are often procured to guarantee the performance of certain fiduciary duties performed by people in public trust or private positions.
In the United States, surety bond premiums exceed $3.5 billion annually. Corporate surety activities are regulated by state insurance commissioners who regulate and license agents and brokers who sell the bonds within their jurisdictions.
The construction industry uses contract bonds to provide surety to the owner of a construction project. They guarantee that the general contractor will meet all contract requirements. Construction contract bonds are a type of surety bond but are different than a contractor’s license bond which may be required for a contractor to be licensed. Bid bonds are another type of contractor surety bond and are used to guarantee a general contractor will take the contract if they win the bid. A performance bond guarantees that the general contractor will perform the work per the contract terms, and payment bonds guarantee that the contractor will pay their subcontractors and for any materials ordered. These contracts are often used in federal projects since it is not possible to get a mechanic’s lien for these projects. Maintenance bonds are used to guarantee a contractor will perform repairs and upkeep for a facility for a specified length of time.
A surety bond is an important mechanism for ensuring the performance of certain contracts. The type of bond will depend upon the details and terms of the contract being guaranteed.
10 Mar 2016