Types of Surety Bonds and Their Purpose

A surety bond refers to a type of insurance protection that is essentially a promise for one party’s liability for the debt, failure, or default to another party. The primary role of these bonds is to ensure that a service required of a given party on behalf of another one is entirely fulfilled. In case the expected service is improperly done or not completed as desired. The affected party (that which suffers the damages resulting from inadequate or improper service) receives compensation.

How Do Surety Bonds Work?

Surety bonds exist in various types, and each one of them is intended for a specific function. These bonds entail a legal agreement between three parties, namely the principal, obligee, and surety.

• The principal refers to the business or individual who promises to perform the set professional service.  It is also the principal who pays for the surety bond on behalf of the other party (surety).
• The obligee is the next party involved in surety bonds. This refers to the individual or business that requires the service from the principal. The party suffers if the service is not adequately done or not done, which eventually warrants compensation.
• A surety is the last party that takes part in the accomplishment of surety bonds. This party (surety) is responsible for compensating the obligee in case the principal fails to meet the agreement and requirements.

These bonds are a guarantee (insurance) that the obligee must get their compensation if any harm is inflicted on them by the principal.

Types of Surety Bonds

Surety bonds are classified into three major categories, which can be further subdivided into multiple smaller classes. The three main types of surety bonds include:

• Commercial surety bonds
• Contract surety bonds
• Court surety bonds

Contract Surety Bonds

They are useful in successfully completing contracts based on the legal requirements as stated in the contract. They are most popular in the construction sector, and they exist in various classes, including bid bond contract, performance bond contract, and payment bond contract.

They aim to compensate the obligee if they suffer any losses due to defaulting on the contract. 

A bid bond contract refers to a surety bond that assures that the bidder will accept and complete the project based on the set terms and conditions.

Performance bonds aim at protecting the project owner from the losses resulting from the contractor’s failure to complete the set task or project based on the set specifications.

Payment bonds are vital for ensuring that contractors compensate the subcontractors and suppliers and any other parties involved in the construction process

Commercial Surety Bonds

These bonds are useful in regulating markets and preventing working professionals from participating in fraud or taking part in any undesirable business practices. The most popular examples of commercial surety bonds are business licenses and permit bonds. As the name suggests, these surety bonds are a government requirement for anyone looking for permits and licenses. 

The government uses them to clear out business people with malicious intents, thereby protecting its money and the general public. Other commercial surety bonds (though less popular) include sales tax bonds, auto dealer bonds, and business service bonds.

Court Surety Bonds

They are used as a means to reducing the risks associated with financial losses for anyone pursuing an action via a law court. They are also suitable for ensuring that any court-appointed task is fulfilled. They exist in two categories: fiduciary and judicial bonds. The latter refers to court bonds that are put in place to limit the potential losses associated with judicial rulings. 

Considering that judicial rulings are almost impossible to predict, these bonds are more risk-averse than the rest of surety bonds which makes them complicated to apply from insurance companies. They can be further classified as bail bonds, plaintiff’s attachment bonds, and appeal bonds.

Fiduciary, which are also known as probate bonds, is essential for ensuring the people charged with managing another party’s assets or financials do so to the best of their knowledge and expertise. They include executor bonds, custodian, and guardianship bonds.

Surety bonds are an essential aspect in any task that involves some levels of risk, especially in business and legal matters. They cushion you from any underlying harm and ensure that the other party pays compensation anytime they do not do as agreed. These bonds are the insurance that you need to avoid losses and harm in life today.