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For business owners and other seeking to protect the relationships they develop with contractors, a bond provides legal guarantee. Legal guarantee means that if one of the construction workers building your new skyscraper decides they no longer wish to, you are protected against the financial risks associated with that person not showing up for work. Additionally, a bond can also function to assist you in finding someone else to fulfill the same responsibilities.
Surety Bonds exist to help you rest easy and effectively mediate with contractors, no matter the type of task. By insuring yourself against unwanted outcomes, a bond acts as a safeguard and streamlines the process of hiring contractors. These bonds can also be used by contractors to guarantee those on the receiving end of their services that they will fulfill their contractual obligations, often as required by law.
Read on to understand if Surety Bond is right for you.
A Surety Bond consists of a contract between three different parties. These parties include the Obligee, who provides the obligation to the principle for completion, the Principle who carries out the obligation and the surety (Insurance Company) who ensures that the principle will carry out the obligation. If the obligation is not carried out, the surety will find another primary to complete the task or ensure that the obligee is compensated for the loss. The surety is a third party that mediates between obligee and primary to ensure that the obligation between both parties is guaranteed. A bond is not insurance but instead a guarantee. Surety Bonds include a three party risk transfer whereas insurance policies include a two party risk transfer. A two party risk transfer describes a process through which the insured person transfers risk to the insurance provider.
In the modern world, independent contractors are everywhere working as hairdressers, construction workers, personal trainers, lifeguards, gardeners, taxi drivers, tattoo artists, interpreters, auto dealers, massage therapists, so on and so forth. While each of these occupations differ greatly, what they all often have in common is a Surety Bond. When seeking to hire a contractor to perform a given task, it is important to cover all your bases and a bond enables you to do just that.
Getting Into the Details…
In many states it is mandatory for one to obtain a bond in order to operate an auto dealership. An auto dealer bond is a guarantee that protects your customers. If you sell a car without taking the proper precautions to ensure that you are doing so according to law and a customer files a claim, you will be held financially responsible.
In many states it is mandatory for one to obtain a bond in order to operate a business. A contractor bond is a guarantee that protects your customers. Example: Construction companies require bonds to guarantee they will build a structure for the obligee receiving their services.
In many states it is mandatory for one to obtain a bond in order to enter a certain profession or carry out certain tasks. A license or permit bond is a guarantee that protects customers. Example: Taxi Drivers require a special license to operate in many states.
A bond that can be acquired to ensure that the principal fulfills their contractual obligation to handle another individual or group's money and other assets with fidelity. Example: You have entrusted someone to manage your assets and want protection.
A bond that can be acquired to ensure that the principal fulfills their contractual obligation to handle another individual or group's and administration or estate properly. This bond usually involves a trustee and beneficiary. Example: You have entrusted someone else to manage your estate and want protection.
Depending on your profession or type of work, a bond may be necessary to obtain. Perhaps, you own a construction company and have been contracted to build a new structure. You may then be required by law to purchase a bond. You may also want to purchase a bond simply to demonstrate to an obligee that you will carry out your responsibilities. If you do not perform your duties, the obligee is guaranteed to recover financial losses and use the recovered amount to pay another contractor to complete the task.
This insurance will come in handy if:
A surety bond is a more of a guarantee than an insurance policy. A guarantee is a three party risk transfer in which the primary transfers risk to the surety for the failure of the obligee to carry out their contractual obligations. By contrast, an insurance policy is a two party risk transfer in which the party being insured transfers risk to the insurance provider.
Knowing the difference between a bond and an insurance policy is important when determining what protection best suits your needs. Whereas insurance policies operate with the expectancy of loss, bonds do not. Instead, bonds simply emphasize that contractual obligations will be carried and if not, financial loss will be recovered for the obligee.
Surety Bond Insurance provides a legal guarantee for obligees with varying needs. Regardless of the specifics, a bond can be acquired that suits your needs.
Generally, the cost of a surety bond is a percentage of a total amount that is paid to a surety for a guarantee. However, every bond is different and the cost depends on the specific circumstances of the relationship in question. For every relationship, there are varying degrees of risk that must be taken into careful consideration. For example, a taxi driver may require a special license or permit to operate or a taxi company may be required by law to purchase a standard bond for its drivers. The surety bond will likely take into account financial liability to both the company and driver as well as the communities they operate in. Through a bond, a taxi company can protect itself against financial obstacles which may arise as a result of the actions of drivers. Additionally, a taxi driver can demonstrate to a taxi company that they wish to work with that they will carry out their contractual obligations. Without a bond, both a taxi company and driver could face significant financial hurdles and damages to their reputation.
Taxi services are often highly regulated and in some states, new drivers are required by law to first purchase a specific license or permit in order to operate. A permit may include a surety bond that protects taxi drivers and/or companies upwards of, for example, $100,000 USD. If the bond has a 1% rate for $100,000 USD coverage, it would cost a taxi driver $1000 to obtain the permit or license. Rates and coverage vary depending on the type of work being carried out, the relationship between obligee and primary as well as the financial risks involved in the agreement.
A Surety Bond is not like insurance which reimburses your business for a loss, covers your liability, or pays for your defense costs. The bond guarantees that you will complete the job or services you agreed to provide, and It will pay the party requesting it if that doesn't happen.
No, insurance is designed to provide protection against losses that may be expected as part of your business operations. A Surety bond is not expecting a loss, as they just guarantee you will complete your work. The Surety company will make sure your business is honorable before issuing one.
The premium you will pay for a Surety bond can vary greatly and is often based on your credit score. Those with good or excellent credit scores will pay much less for a bond than someone with a bad credit score. Additionally, the type of business you are in will influence the price as well, with riskier professions paying more.
This insurance is great for businesses who offer advice to their clients. Professional Liability Insurance specifically covers a business from being liable should an error or omission occur, that leads to a financial loss for the customer.
Just like your personal auto policy, Commercial Auto Insurance, covers liability, collision, and medical payments should an accident occur with your commercial vehicle. Your personal auto policy will not cover damages while the vehicle is being used for business purposes.
Umbrella Liability can be a great solution for a business that needs more liability coverage than what is offered in their General Liability, Employer’s Liability or Auto Liability Plan. Umbrella coverage can be purchased as a standalone policy or can be bundled with a General Liability policy.
This insurance provides a business with protection should a mistake have been made while delivering professional services. Your General Liability policy will not provide you with this level of protection, so if your company gives advice or provides contracting services you may need this insurance.
The directors and officers of a privately-held company are at risk from suits by a variety of different people, such as customers, for example. However, the greatest number of lawsuits against directors and officers come from the employees of a company itself. Directors and Officers Insurance covers your management team, should things go south. You’ll often find D&O packaged with EPLI.
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