Types of Surety Bonds

Surety bonds are crucial monetary instruments that generally act as a sort of financial or insurance guarantee. Chiefly, the facility is used to shield a business or an individual contractor, or any other person, from financial losses that may be incurred due to defaulted contractual agreements.

Understanding surety bonds
Surety bonds essentially work in a three way relationship: as a financial agreement between the “principal”, the “surety” and the “obligee” with an aim of assuring that the contract in question will be fully implemented. The principal is the organization or the person performing the contractual obligation, whilst the obligee is the receiving organization. The surety is the financial institution that typically guarantees that the principal will perform the allocated job. In the event that the principal defaults on the contract, the obligee can recover from the resultant losses by using the surety bond.

The amount of compensation paid to the obligee by the surety, in the event that the principal fails to meet the obligation, is referred to as the penal sum. The surety later recovers the penal sum from the principal. In return for the service of issuing the surety bond, the financial institution or the surety, is rewarded with a premium whose value is determined by the penal sum paid by the principal.

There are many types of bonds and the term “surety bond” is the generic name used for them all. These bonds are contract bonds that comprise of bid bonds, maintenance bonds, payments bonds and performance bonds, and are mainly used in construction arena. The others types of bonds are permit and license bonds, which are basically required by law. Additionally, such bonds as bail bonds are used to secure the release of offenders prior to their trial date. Commercial bonds normally lend credibility to business enterprises. However, depending on the type of a mandatory contractual obligation and the nature of the contract, there are other many types of differing surety bonds. Below is an analysis of some surety bonds.

Contract bonds
Performance and contract bonds are the most common type of secured bonds. These are designed to guarantee that a contract is done as per the terms and conditions in the written promise. There are many sub categories within the main category. Some examples of contact bonds include, bid bonds, performance bonds, and payment bonds. Bid bond guarantees the contractor will enter into a contract if their bid is the lowest. A payment bond guarantees that vendors, subcontractors, suppliers, laborers and any other person connected with the contract, will be paid. A performance bond takes care of the actual contactor’s performance whilst implementing the contract.

License and permit bonds
If you are required to have a license to operate a business or offer a service, then you are required by law to carry a license bond that guarantees that you will comply with the codes and regulations established by that particular state or local entity. Such people as plumbers, electricians, general contractors and many other licensed experts who offer services to the community are required to maintain a license bond so as to satisfy the local or state laws.

Probate bonds
This type of a bond is designed to guarantee honesty amongst individuals, specifically accounting people charged with the duty of managing the finances or the estate of a deceased person. This service is generally engaged if the children left are under age or the next of kin is incapable of managing the estate due to one reason or another.

Bail bonds
Bail bonds normally guarantee full bail amounts for charged parties and assure that they won’t fail to honor the stipulations of their release.

Apart from the above summarized bonds, there are many others not mentioned so when seeking them out, it is important to request the services of respectable, reliable and prominent bond services offering agencies so as to simplify things. With the help of an efficient bond services offering agency, the client will be able to get the most appropriate surety bond in a fast manner and almost effortlessly. Nevertheless, these agencies charge some sort of a premium for their services, although competitive. Depending on the surety company used, surety bond premiums vary in their pricings. Mostly, their costs are approximately 1% to 2% of the total bond amount.

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