Surety bonding is a kind of insurance or contract among three parties or individuals. The principal is the organization that is protected against default. The obligee is the second individual or organization who receives the bond and the last one known as surety makes sure that the promises made by the principal are performed.
What is Surety Bond?
In order to understand what is a surety bond you should be able to comprehend the types of bonds prevalent in the U.S and why you require a bond. The surety is obliged to fulfill the contractual obligations that the principal promised at the initial stage of the contract. Bond types are of two categories: commercial and contract bonds. As the name suggests, contract bonds gives you a guarantee of a particular contract. Examples of this type include supply, bid, performance, subdivision and maintenance bonds. Commercial bonds are another category and examples of these are permit and license bonds. Surety bonds are essential for a construction contract that has a value of $ 100,000 or over this amount. Most private entities, municipal or State governments have the same requirements. If you are working with your state, city or county government, surety bonds may not be required; however, it is better to confirm this with local authorities.
Surety bonds provide protection to businesses when there is a high risk situation. In construction industries these bonds are considered as a security. Commercial bonds are permits and licenses that certain businesses should obtain in order to conduct their business. U.S State and local governments have laid down regulations regarding this. There are different types of permit and license bonds such as bonds of mortgage broker, auto dealers, contractor license and talent agencies. Sales tax is an example of a commercial bond that is non-licensed. It is easy to get a commercial bond; you can contact an insurance company that deals in surety bonds and obtain information from them about the price which typically will depend on your credits. The pre-determined amount to be paid by the surety if the principal defaults is called the penal sum; it’s good to check out this amount too. The application form with all the details have to be filled in which includes your financial history. Once you receive the approval, you will have to start the payments on the premium.
A surety bond that is issued by the guarantor to the client who is the principal to guarantee successful conclusion of an assignment by the concerned contractor is known as bond performance. It guarantees payment of money if the contractor does not succeed in the entire performance of the agreed contract. Legally, the consumer can file a suit against the contractor and he is entitled to get back the contract amount and also the damages. These bonds are normally used in the real estate and construction industries. Financial institutions and banks are usually the third-party. When the contract is agreed upon, all the legalities are spelt out which is evaluated by a financial agency. All this protects the client; hence, only reputed contractors are ready to take the bonds. Consequently, banks are generally not keen to be the guarantor for new contractors.
Surety bonding | Commercial bonds
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