A surety bond is a legally binding contractual agreement between three parties, all of whom are involved in a work task or project, which will be accomplished by the first of the three parties, known as the principal. The principal is usually a professional contractor offering services to the public for which he has been trained, and has been providing professionally for some period of time.

The contractor is hired by a party known as the obligee. The obligee hires the contractor with the understanding that certain terms specified in the surety will be lived up to, generally regarding quality workmanship, completion of all work specified, and within any time constraints imposed by the obligee.

The third party in this arrangement is a financial organization known as the surety company, which acts as a kind of insurance company that sells the surety to a principal. The surety must pay out an amount of money to the obligee when any claims are made against the bond.

How Do They Work

They work something like insurance, in that one of the parties in the surety agreement is protected against financial loss and can be compensated if specific negative circumstances arise. With an insurance policy, that negative circumstance is usually the loss of life by an individual identified in the policy, for which the beneficiary would be compensated with an amount of money identified in the terms of the policy itself.

What is a Surety?

In the surety, there is that same potential for a party to be compensated financially, but the condition that triggers that compensation does not involve loss of life – it has to do with certain bonding terms being unfulfilled. If the principal who purchases a surety fails to live up to the terms specified in the bond, then the company that hired the principal would be entitled to make a claim against that bond, to be reimbursed for the unfulfilled promise made by the contractor.

The mechanism that requires a contractor to live up to the terms agreed to is a very important one, because it provides a level of assurance to the obligee that quality workmanship will be completed on the project in question. If those terms satisfied by the contractor, the penalty can be very severe for that contractor, including a damaged reputation resulting from a claim made against the bond.

In addition, although the surety company would be obligated to initially pay out any claim made against the bond, the surety company would then seek financial redress from the contractor who failed to live up to terms of the agreement in the first place. This normally acts as a very strong incentive for a contractor to fulfill the terms of any work agreement made with the hiring company and is in truth, a kind of insurance for that obligee that work will be done in a satisfactory manner and will be completed on time.

Why you need to get bonded?

Getting bonded can be an important business step for a contractor, because it provides some kind of assurance to the public or to a hiring company, that you will live up to your promises as a professional, and provide quality services that are agreed to. Contractors who are not bonded lack this kind of assurance that quality work will be completed on time.

Anyone hiring a non-bonded contractor doesn’t get the same level of confidence when hiring a bonded contractor. In businesses where professional services are being offered, it is typically very important that potential clients have confidence in your ability and workmanship, and bonding can provide that level of confidence, separating you from the competition. NFP only bonds with top-rated carriers.

Examples of how bonding helps people

Bonding really helps all three parties involved in the bonding arrangement. It’s beneficial for the contractor who purchases it because it provides a level of confidence for any client who may be thinking of hiring you. The obligee party in the bonding agreement benefits by having protection against financial loss so that if the quality of workmanship is inadequate, the customer won’t suffer a total loss. The surety company also benefits in this arrangement, because it sells a bond to the principal for an amount generally equal to 10%-15% of the face value of the bond.

Industries Requiring a Bond

Because sureties are useful to all three parties in the contractual agreement, they can be extremely useful in virtually every industry in this country. Having confidence that a professional will provide quality services in the completion of a work project is a fundamental principle that all industries can take advantage of.

It’s easy to see why the construction industry would be one of the biggest users of sureties because, in any major project, many contractors might need to be hired to have quality workmanship completed on time. Government organizations are another big user of sureties since they must account for taxpayer funds spent on public works. Quite often, the hiring procedure for government organizations includes the selection of contractors who are bonded for the work to be done.

Let Us Help

If you want to learn all about sureties, and how they work, contact us. Our team of professionals will help you every step of the way.