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What Are Surety Bonds?
Usually, when someone starts a new business, it is important to know that he might be required to obtain a surety bond before he could open up his doors to the public. The government typically requires surety bonds for construction contractors, motor vehicle dealers, freight brokers, and many other types of businesses and professions to provide bonds in the event of necessity. Therefore, it is critical as well to understand the principal mechanics and the need for surety bonds, their components, how it works, and how to secure one upon demand.
For Purposes of Definition:
- A principal: This represents the bond policyholder
- An obligee: This is the entity or business or government agency that requires the bond
- A surety: This is the actual company issuing the bond
Surety and Fidelity Bonds to Fit Your Needs
By legal definition, a surety bond is a contract, inclusively, among the three major parties mentioned above—the principal (you, the bond seeker), the surety (us, usually the bond or insurance company), and the obligee (the entity requiring the bond)—in which the bond or insurance company or the like, financially guarantees to an obligee that the principal will act in accordance with the terms of the agreement established by the bond issuer, which he agrees to redeem to a second party (the obligee), which guarantees a redemption in payment in the event of a default in the execution of the agreement to the third party, claimed as the principal. Goodluck Insurance Agency has the expertise in the underwritten process and offers unlimited avenues to provide both easy and difficult to approve surety bonds for multiple occasions and purposes, including industries and many civil and industry professionals.
Surety Bond Information
If you are a contractor (of any industry, you’ll promise clients that you’ll finish their work according to the terms of the contract which ultimately is legally-binding. Yet, you can’t eliminate the possibility that a project will go away without the fulfillment of the contract. If you fail to honor your obligations, what can you do? Many businesses turn to Surety Bonds to help in case of project defaults.
What is a surety bond?
Surety bonds fall under the umbrella of consumer protection.
Generally, it functions like an insurance policy.
If you make a contract with a client, a surety bond functions as a guarantee that you will do the work accordingly. If you fail to follow or complete a contract, the client can file a claim against the bond company as a failure for breach of the agreement. Therefore, they will be able to recoup some of the money lost by the failure to fulfill the project.
How Do Bonds Differ from Insurance?
Yes, bonds offer financial guarantees or settlements for your clients. Still, they are not the same as insurance.
With insurance, the insurance company pays a settlement on your behalf. Under a bond, however, you must pay the settlement to the affected customer. Therefore, the bond functions like a guarantee that you will cover the customer’s losses in case of a problem on your end. It tells your clients that you have the financial backing behind you to do their work appropriately.
Who Are the Parties of a Surety Bond?
As mentioned earlier, surety bonds involve three parties:
- The Principal: The person, company, or entity carrying the bond. If you are the contractor, you will have a bond in your name.
- The Obligee: This is the individual who benefits from a bond. It is usually the party who you work with under a contract. He/she will be the one to make a claim on a bond if necessary.
- The Surety: The company that issues and maintains the bond. The principal pays the surety a premium to maintain the bond. In some cases, the bonding company will pay a settlement to the obligee initially. The principal must still compensate the bond company, however.
How Much Bonding Do You Need?
Countless standards go into determining how much money principals need to carry on bonds. For example, industry standards and a company’s net worth often play a role.
One of the best places to look for, however, is within the contract itself. Many obligees will require the principal to carry certain bonds. Indeed, they might only award a contract after the principal enrolls in the bond. Work closely with your obligee to make sure you have bonds according to stipulations.
Bonding can help you win contracts and better serve your customers. Let us help you determine the appropriate amount of coverage for your needs
While a surety bond protects your customers if your actions cause them financial harm, then a fidelity bond protects your business.
Depending on the details of your fidelity bond, it may cover you if your employee steals from your customer, commits fraud, or embezzled funds from your company. Fidelity bonds are helpful for situations where your regular insurance policy might not cover. They are useful for a wide range of businesses, including retail stores, subscription service providers, janitorial services, and so on.
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