Types of Surety Bonds You Need to Know About

Surety bonds are issued by entities to protect them against financial and credibility losses. They involve three main parties, the surety company, the obligee, and the principal. These bonds protect businesses against fraudulent acts and possible losses that follow. Any kind of illegal or unethical act that destroys a company’s credibility or results in a financial loss is covered by the right type of surety bond. While some surety bonds are issued by business owners and private project managers, others are required by the government and law. Some surety bonds are also issued to finish an ongoing project at a quicker pace without causing any hurdles.  

Here are the four main types of surety bonds that everyone should be aware of. 

 

  • Commercial Bonds

 

Government agencies of respective locations (at the local, state, and federal levels) mandate commercial surety bonds that require every new and licensed business owner, such as a contractor or liquor store owner) to have a commercial surety bond. The commercial surety bond is further divided into 3 types, which are –

Mortgage Broker Bonds

This bond type protects business owners and borrowers from the ill practices of brokers and lenders. Every mortgage owner of respective states should adhere to the rules specified in the mortgage broker license code. These may vary from state to state. 

License and Permit Bonds

Government organizations need a license and permit bond to protect public interests from a contractor or business owner who fails to get a professional license. The professionals obliged to get this type of bond includes plumbers, contractors, electricians, etc. 

Other types

Commercial surety bonds are further segregated into several types of bonds, such as utility, lottery, liquor, fuel tax, auto dealer, warehouse, and auctioneer bonds. 

 

  • Contract Bonds

 

This type of bond is popular among construction contractors and builders as they often need protection against contractual obligations. In such a case, this surety bond states that the bonded contractor is obliged to carry out the construction process and abide by the standards mentioned in the project. Basically, this surety bond commits to specific contracts. The contract surety bond is further divided into 4 types, which are-

Payment Bonds

According to this type of surety bond, the concerned contractor is obliged to fulfill the tasks specified in the bond along with the guarantee of payment that must be made to the suppliers and subcontractors.  

Bid Bonds

This type of surety bond ensures that the contractor who bids on a project gets it. Every bid bond is often accompanied by a performance bond to keep the integrity of the project. Since a lot of contractors walk out of a project after winning the bid, this bond ensures that they comply with the project specifications and complete it before they decide to quit. 

Maintenance Bonds

In case the project takes a wrong turn, this bond protects the owner from incurring financial losses due to the mistakes made by the contractor, faulty construction, or the use of low-quality materials. The contractor has the option of paying compensation or fixing the issues. 

Performance Bonds

Typically, insurance companies issue performance bonds to obligate the concerned contractor into performing their duty and fulfill construction-related tasks. The bond will specify the tasks in detail that the contractor is obliged to completing. If the contractor fails to abide by the specifications, they must pay the stated compensation. 

Performance Bonds

 

  • Court Bonds

 

When the bond is required by a court or needed to be issued in specific circumstances, it is recognized as a court surety bond. Commonly known as a judiciary bond, this type of surety bond is issued by defenders and plaintiffs to protect them during court proceedings. A representative overlooking an individual’s estate may also need a court surety bond if required by the judiciary system. There are several examples of court bonds such as probate or fiduciary bonds, supersedeas bonds, administrator bonds, attachment bonds, and cost bonds.  

 

  • Fidelity Bonds

 

This bond is commonly used by policyholders to protect themselves against frauds and the losses that follow. These fraudulent acts are incurred due to the dishonesty of a company’s employees who primarily administer the company’s valuable assets, cash, and other financial aspects. Depending on the type of business you own, you can choose from various types of fidelity bonds. The company issuing a fidelity bond is the principal and the company’s employees or customers are the obligee. It is also commonly known as a ‘blanket bond’. Different types of fidelity bonds include employee dishonesty bonds, business services bonds, and ERISA bonds.   

These surety bonds are needed to conduct business on a fair basis and protect yourself from major financial losses. More importantly, they ensure that the ongoing projects are completed on time without causing any damage to the company. In case a contractor walks out, most surety bonds specify the need to replace the project manager. 

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