What is a Bond?
There are two types of bonds; surety and fidelity. A surety bond is a contract between three parties—the principal (you), the insurance carrier (the surety) and the obligee (the entity requiring the bond). The contract guarantees to the obligee that the insurance carrier, or surety, will financially assure the principal will act in accordance with the terms established by the bond. In other words, the insurance carrier will pay your client, or entity requiring bond, should you fail to deliver the goods or services agreed upon. This is one of the only examples of insurance that is bought to cover a third-party from loss. When a contractor receives a deposit before fixing a customer’s roof, for example, he/she is expected to come back to fix the roof. If the contractor fails to fix the roof in a timely manner, as agreed upon in the contract, or fails to finish fixing the roof, then he/she has defaulted on their end of the contract, leaving the customer with unfinished work and a lost deposit. The customer, in this case, would have a valid claim against the contractor so the surety bond would cover the customer’s losses. This is a common scenario, unfortunately, and the reason why surety bonds are required for certain industries. Professions with statistically high risk of customer loss claims have been regulated by state and federal governments to protect third-parties from fraud, court costs and negligence.
There are over 50,000 types of surety bonds in the United States, based on bond requirements, bond amounts and state regulations. There are several reasons your business may need to carry a bond.
- You need to get licensed.
- Certain industries require surety bonds to get licensed, they are typically referred to as license and permit bonds. Common license and permit bonds include:
- Motor vehicle dealer bonds.
- Mortgage broker bonds.
- Contractor license bonds.
- Collection agency bonds.
- Private investigator bonds.
- You need one for a construction project.
- It is common for construction contracts to require contractors to have surety bonds in place. Known as contract bonds, these commonly include:
- Payment bonds.
- Bid bonds.
- Performance bonds.
- You need one for a court proceeding.
- Sometimes a court of law will require a court bond before court proceedings commence. Court bonds ensure protection against possible losses as a result of court decisions and commonly include:
- Cost bonds.
- Indemnity to sheriff bonds.
- Replevin bonds.
- You want to add marketing value to your business.
- Not all bonds are bought because they are required. A fidelity bond is an optional bond that can add value to your business. This type of bond protects your customers from employee theft, fraud or embezzlement (not otherwise covered by business insurance). There are many types of fidelity bonds, some businesses known to benefit from these bonds include:
- Janitorial services.
- Bookkeepers.
- Landscape services.
