Why Do I Need to Buy a Surety Bond?

Surety bonds ensure that contracted firms complete the work they were hired to do. If a contracted business fails to fulfill the terms agreed upon, its bond guarantor is obligated to compensate the customer. Surety bond or business bond insurance can be obtained from insurance companies. If you own a construction business, you may be required to have a surety bond for you to bid for government contracts. Additionally, if you run certain businesses, such as liquor stores and auto dealerships, you need surety bonds to conform to permitting and licensing laws.

What is a Surety Bond?

Surety bonds are legally binding agreements that guarantee services or tasks will be completed as per the contractual terms. A surety bond involves three parties:

  • The obligee

    The party that requires an assurance that the work will be done as per specified terms.

  • The principal

    The business contracted to perform work as per the specified terms.

  • The surety

    The entity that issues the surety bond warranting that the principle will adhere to its contractual obligations. The surety is usually an insurance company that bears the financial responsibility if the principal doesn’t meet its obligations.

How Do Surety Bonds Protect the Obligee?

Suppose the local government agency hires your construction company to build a road. Still, it needs assurance that you will complete the work within a certain period in compliance with the local laws. In this case, your business is the principal, and the government agency is the obligee.

You will have t0 bring on board a surety. The surety will write a bond or agreement guaranteeing that the work will be completed according to the agreed terms. The surety bears the financial responsibility if needed. If you, as the principal, fail to meet the contractual terms, the surety will be obligated to compensate the local government. The surety will then recover its expenses from you.

Types of Surety Bonds

The two main types of surety bonds are:

  1. Contract Bonds

    Contract bonds/construction bonds are used for construction projects. In this case, the principal is the contractor hired to do the construction work, and the obligee is the project owner. The four main types of construction bonds include:

    • Bid bond

      Protects the project owner if a contractor wins the bid but fails to sign the contract.

    • Payment bond

      Assures the project owner that the contractor will pay for the expenses incurred in buying materials, hiring labor, and paying suppliers and subcontractors.

    • Performance bond

      Guarantees that if the contractor fails to do the work, the surety will replace the contractor and ensure the work is completed as per the contractual terms.

    • Maintenance or warranty bond

      Protects the project owner from defective material and workmanship issues found within the warranty period.

  2. Commercial Bonds

    Commercial surety bonds are usually required by local, state, and federal governments to ensure that the public interest is protected and the work meets specific regulations. The most useful types of bonds for small businesses are permit and license bonds, which are legally required for a business to obtain a permit or license.

Advantages of Owning a Surety Bond

If yours is a small enterprise, having a surety bond can help your business compete with more established players. This is because a surety indicates that your firm meets the underwriting criteria. Additionally, a surety reduces the obligee’s financial risk when working with a less established business. It warranties that they will recoup losses if the principal fails to meet their contractual obligations.

To know more about surety bonds that can help your business thrive, reach out to us at Pittman Insurance Group. We have the expertise to help you decide which types of bonds are most suited to your business.

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