What a Surety Bond Is All About:
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.
What Is a Surety Bond?
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.
Do I Need a Surety Bond?
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:
- You are a business owner and live in a state which requires you to obtain a bond in order to legally operate
- You are an independent contractor and want to provide the obligee with a guarantee that you will carry out your contractual obligations
- You are required by law to obtain a bond as part of a specific permit or license to enter a certain profession or carry out a certain type of work
- You are seeking to build relationships with customers
- You have an estate or administration that you need handled by another individual or group and want protected
- You have money or assets that you need handled by another individual or group and want protected
- A legal guarantee is required for a public official or court system
Still not sure what you need?
CoverWallet's Insurance Checklist , you'll find a list of insurance types needed for your specific business or industry.
What Does a Surety Bond Cover?
At a High Level...
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.
Getting Into the Details…
While every bond is different, and they can vary depending on the specific protection that you need, each includes a legal guarantee for the obligee. There are several types of bonds you can choose depending on the type of guarantee you need such as:
|TYPE OF BOND||DESCRIPTION||EXAMPLE|
|Auto Dealer Bond||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.||Example: Auto dealers require auto dealer bonds to operate an auto dealership in many states.|
|Contractor Bond||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.||Construction companies require bonds to guarantee they will build a structure for the obligee receiving their services.|
|License & Permit Bonds||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.||Taxi Drivers require a special license to operate in many states.|
|Fidelity Bonds||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.||You have entrusted someone to manage your assets and want protection.|
|Fiduciary Bonds||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.||You have entrusted someone else to manage your estate and want protection.|
You’ll Know It’s the Right Policy If It Covers:
- If you are entering a profession which requires a permit or license
- If you are a business owner and your state requires you to obtain a bond in order to operate
- If you are a contractor and want to guarantee your work to customers
What Does a Surety Bond Not Cover?
- Insurance for any risks associated with the contractual obligation
- All potential losses
What Are the “Limits” on a Surety Bond Insurance Policy?
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.
How Much Does a Surety Bond Cost?
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.