What Is A Surety Bond

If youve been contacted by a state licensing authority such as a Liquor Control Board

or the Division of Motor Vehicles or a court has required you to get a surety bond, the following information may be useful to you. Technically speaking, surety bonds are insurance products. However, unlike insurance policies, surety bonds do not protect the person purchasing the coverage, but rather provide coverage to a third party. Surety bonds guarantee that you, as the purchaser of the bond (the Principal) will perform as required by the third party, also known as the Obligee. Surety bonds are necessary any time an individual, group, or organization is expected to do something, and the party promised is in need of further assurance of their compliance.

Why do you need a surety bond? Youll need a surety bond if youre operating a business, fulfilling requirements of local or state governments, or obtaining any type of license. Obliges may require a surety bond in order for you both to do business. Both a surety bond and insurance policy are a means of transferring risk and providing for in the event of a financial loss. As insurance companies transfer risk from the holder of the policy, so do surety bonds protect a third party against losses to the Oblige, and not the policy holder. Surety bonds differ in that they are three party agreements, that is, theres a Principal, Oblige, and Surety.

The principal is the person or organization being secured, the second party, the Oblige is the organization or individual who is owed money, and the third party is the surety, the party who promises to cover losses and pay a certain amount, should the principal party default for any reason. Additionally, insurance companies expect losses and accordingly structure premiumsthis is not the case for surety bonds. Loss is not anticipated.

How Surety Bonds Work:

The principal and surety (usually an organization or underwriter) enter into a contract, promising reimbursement in the case of a default of obligation to the Obligee.

If the principal does default, the surety must provide the agreed amount of money to the Obligee.

The principal party is still obligated to reimburse the surety. Legally, the surety is granted the same rights as a lender in retrieving loss.

Surety bond premiums can vary in pricing, depending on which surety company you use. Most typically, the surety bond will cost 1%-2% of the bond amount. If youre wondering where to get a surety bond, they are sold though licensed insurance agencies who represent various surety companies, however many insurance agents lack the knowledge and expertise necessary to service the product as surety is a highly specialized field.

by: Erica Ronchetti

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