In the state of Pennsylvania, there are certain legal situations in which one party needs financial reassurance that another party will follow through on a specific set of actions. This may sound, at first glance, like it needs an insurance policy; but actually, this is the type of situation in which the two parties would seek out a bonding solution. If you’ve never heard of a surety bond Pennsylvania, don’t worry. Even people who work in industries that regularly use bonds don’t often understand what these are or how they work. That’s why our team is ready to explain the basics of bonds.
What Is a Pennsylvania Surety Bond?
To make it simple, a surety agreement is essentially a legal assurance that one person or business will follow through on an agreed-upon contract. Pennsylvania surety bonds are a legally binding agreement between three parties: the principal, or the person or biz that needs to follow through with a specific action; the obligee, or the person or business that needs the reassurance that the contract will be fulfilled; and the bonding company.
The big reason why an obligee needs a bond is due to financial risk. The types of situations that a bond would be needed involve some kind of financial risk that the obligee is assuming, if the principal does not follow through on the contract. In that event, the bond pays for the financial risks that were accrued. In this way, bonds do sound a little like insurance, but there are some key differences between the two.
How Is a Surety Bond Different from Insurance?
First, sureties are an agreement with three parties, not just two. Insurance policies are legal agreements between the principal and the insurance agency. Bonds work with both parties to ensure that everyone’s needs are met in the agreement.
Insurance policies are usually much broader and more expensive. These policies are designed to cover big risks. Pennsylvania surety bonds, on the other hand, are designed to cover smaller financial obligations, and are written for very specific instances. For example: an insurance policy for a business might cover any injury that a worker could sustain on the job. A bond might cover the legal fees that a business owner is served if a contractor they hire doesn’t perform work up to the local legal standards.
Bonds are also sometimes repaid by the principal if the losses are recoverable. This isn’t always the case, but it does make bonds a little different from insurance, which is never repaid. Bonding agencies are very careful with what situations they award bonds in – not every situation will be considered a safe enough risk to earn your bond.
What Types of Sureties Exist in Pennsylvania?
There are many cases where two parties might need a Pennsylvania surety bond. Here are seven types of sureties available:
- Commercial bonds, or license and permit: these bonds guarantee that a contractor performs all work up to the legally required standards of the local or state government.
- Contract bonds or bid bonds: these guarantee that a contractor will perform work for the amount that is bid.
- Public office bonds: these guarantee that any publicly elected official will act in accordance to the law, to protect taxpayer dollars.
- Judicial bonds: these guarantee that one party involved in a law suit will follow the ruling of the judge when judgment is made.
- Fidelity: these cover the losses to an employer if their employee steals from them.
- Fiduciary: these bonds guarantee that if a person is acting as a legal representative for another person, any losses in assets to the person being represented are covered.
- Federal bonds or miscellaneous bonds: there are quite a few other situations in which a bond may be needed. Because bonds are based on situation, rather than being awarded to a person or business for their own merit, there can be just as many bonds as there are unique business deals. So for example, there are bonds meant to cover losses due to illegal actions on the part of import/export businesses. This is just one example of the hundreds or even thousands of types of “miscellaneous” bonds.
How Does a Bond Typically Work in Pennsylvania?
- Two parties agree on mutual terms for some kind of action.
- These parties purchase a surety to ensure that the financial obligations related to the action are covered.
- Both parties act according to the agreement.
- When the action is completed and the contract is fulfilled, the surety expires. It provided a much-needed safety net for peace of mind during the transaction, and was never needed. The cost of the surety is chalked up as a necessary business expense, similar to paying for worker’s comp insurance for workers who may never get hurt on the job.
However, what happens if the principal does not follow through with their obligation? In that case, the obligee will accrue some kind of financial fines or fees that they must pay for as a result of the actions not being completed as agreed upon. They then contact the bonding agency, and those financial obligations are paid for by the bond. In this case, the bond provided a tangible safety net to cover the expenses caused by the broken contract.
If the expense can be recovered, such as in the case of employee theft, then the obligee will pay back the bonding agency once the asset is recovered. If the assets can’t be recovered, then the employer did not lose anything due to the theft, and can continue business as usual. This is why sureties are an excellent idea for business transactions between any two parties at any given time.
Our team provides affordable Pennsylvania surety and fidelity bonds. Apply for your bond in Pennsylvania now by completing our surety application or call us and learn how to get bonded in Pennsylvania today.