Before setting up a business that requires a surety bond, very few people know what surety bonds are. If you are just hearing about this term for the first time, it is advisable to research to familiarize yourself with what surety bonds are. As you read more about surety bonds online, you will learn about the different types of surety bonds and the one that your business requires. Reaching an agency that issues surety bonds is the next step that you require to make to get a surety bond.
The process of applying for a surety bond includes providing information about yourself and your business including the name of your business, the physical address, and the number of years that your business has been operational. Additional information like your credit history, business license, and social identification numbers may also be needed for the application of a surety bond. This article explains what surety bonds are and who requires them.
What Are Surety Bonds?
The Parties to Surety Bonds
Understanding what a bond means helps you to get a deeper understanding of surety bonds. A surety bond is by a mutual contract that is legally-binding that involves three parties. The principal is the first party to the surety bond who is the person or the business who is purchasing the bond as an assurance to the future performance of a certain job. The second party to a surety bond is the obligee which is the party that requires the bond.
The government and other state authorities are the main obligees that regulate how businesses conduct their business. By definition, a surety is the insurance company that is a backup plan for if the principal fails to fulfill the requirements of the bond and this makes up the third party of a surety bond. There are different types of surety bonds depending on the purpose for which they are given.
Understanding How Surety Bonds Work
Some of the purposes for which surety bonds are given include ensuring that businesses comply with the licensing and permit regulations that are laid down by the local or state authorities. At other times, surety bonds may be given to ensure that people or businesses pay taxes and fulfill other financial requirements.
Most surety bonds are given for a period between one and three years. As stated in the definition, surety bonds are legally binding which means that the parties that are involved need to sign some documents like the bond form which also has to be signed by an attorney. A bond form is a contract that contains information about the parties to the bond and explains what their obligations are.
If the principal fails to perform the work that it took out the bond for, the obligee can file a claim with the (surety) insurance company to get compensation for any losses it has incurred. The surety pays to refund the obligee money that equals the bond when their claim is valid.
Who Needs Surety Bonds?
Motor Vehicle Dealers
Motor vehicle dealers also require surety bonds so that they acquire the necessary licensing from the state. These surety bonds protect the buyers of these cars in case the dealer engages in fraud or fails to pay the required taxes.
Surety bonds are also necessary for private investigators to protect them in case they engage in illegal practices as they do an investigation. These surety bonds are also helpful when the private investigators violate people’s privacy and in case they get in trouble with lawmakers.
Mortgage Brokers and Public Adjusters
Mortgage brokers also require applying for surety bonds before they can start operating their businesses. These surety bonds help the brokers to acquire licensing for their businesses. Public adjusters also require surety bonds to get licenses. If you have a business that is licensed by the government, you require a surety bond.
Contractors and Credit Services Providers
Organizations that offer credit services also require surety bonds to keep them in check and prevent them from unethical practices. Any person or business owner who wants to become a contractor for government contracts requires a surety bond that ensures the government that the person will perform the tasks given to them.
In conclusion, surety bonds are legally binding contracts that involve three parties that are the principal who is the person applying for these bonds, the obligee who in most cases is a government entity, and the surety which is the insurance company. The purpose of surety bonds is to ensure that businesses perform required tasks well and that they also pay their taxes and other financial requirements. In case the principal fails to perform the task, the obligee files a claim with the insurance company (surety) for the losses that it has incurred. The surety repays oblige an amount equal to the bind if the claim is valid.