SURETY BOND

surety bond, or surety is a promise by a surety or guarantor to pay one party the obligee a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation. Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guaranty performance and completion per the terms of the agreement. The principal will pay a premium (usually annually) in exchange for the bonding company’s financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred. If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered accordingly,. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both. A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal’s default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly. Surety bond also occur in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust. As of 2009 annual US surety bond premiums amount to approximately $3.5 billion. State insurance commissioners are responsible for regulating corporate surety activities within their jurisdictions. The commissioners also license and regulate brokers or agents who sell the bond

Contract surety bond

Contract bond, used heavily in the construction industry by general contractors as a part of construction law, are a guaranty from a Surety to a project’s owner Obligee that a general contractor (Principal) will adhere to the provisions of a contract. The Associated General Contractors of America, a United States trade association, provides some information for their members on these bonds. Contract bonds are not the same thing as contractor’s license bond, which may be required as part of a license. Included in this category are: bid bonds, guaranty that a contractor will enter into a contract if awarded the bid, performance bond, guaranty that a contractor will perform the work as specified by the contract, payment bond, guaranty that a contractor will pay for services, particularly subcontractors and materials and particularly for federal projects where a mechanic’s lien is not available, and maintaince bond guaranty that a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are subdivision and supply bond. Bond are typically required for federal government projects by the Miller Act and state projects under “little Miller Acts” In federal government, the contract language is determined by the government. In private contracts the parties may freely contract the language and requirements. Standard form contracts provided by American Institute of Architects (AIA) and the Associated General Contractors of America (AGC) make bonding optional. If the parties agree to require bonding, additional forms such as the performance bond contract AIA Document 311 provide common terms. Commercial bond represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.

License and permit bonds

License and permit bond are required by certain federal, state, or municipal governments as prerequisites to receiving a license or permit to engage in certain business activities. These bonds function as a guaranty from a Surety to a government and its constituents (Obligee) that a company (Principal) will comply with an underlying stature, state law. municipal ordinance, or regulation. Specific examples include:

• Contractor’s license bonds, which assure that a contractor (such as a plumber, electrician, or general contractor) complies with laws relating to his field. In the United States, bonding requirements may be at federal, state, or local level.
• Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import duties and taxes. Tax bonds, which assure that a business owner will comply with laws relating to the remittance of sales or other taxes.
• Broker’s bond, including Insurance, Mortgage, and Title Agency bond
• Motor vehicle dealer bond
• Money Transmitter  bond
• Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.

Court bond

Court bonds are those bonds prescribed by statute and relate to the courts. They are further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies. Fiduciary or probate bonds are filed in probate courts and courts that exercise equitable jurisdiction; they guaranty that persons whom such courts have entrusted with the care of others’ property will perform their specified duties faithfully.

Public official bond

Public official bonds guaranty the honesty and faithful performance of those people who are elected or appointed to positions of public trust. Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, law enforcement officers, and Credit Union volunteers.

Miscellaneous bond

Miscellaneous bonds are those that do not fit well under the other commercial surety bond classifications. They often support private relationships and unique business needs. Examples of significant miscellaneous bonds include: lost securities bonds, hazardous waste removal bonds, credit enhancement financial guaranty bonds, self–insured workers compensation guaranty bonds, and wage and welfare/fringe benefit Union bonds.

Business Service Bond

Business service bond are surety bond which seek to safeguard a bonded entity’s clients from theft.  These bonds are common for home health care, janitorial service, and other companies who routinely enter their homes or businesses. While these bonds are often confused with fidelity bonds, they are much different. A business service bond allows the bonded entity’s client to claim on the surety bond when the client’s property has been stolen by the bonded entity. However, the claim is only valid if the bonded entity’s employee is convicted of the crime in a court of law. Additionally, if the surety company pays a claim on the bond, they would seek to be reimbursed by the bonded entity for all costs and expenses incurred as a result of the claim. This differs from a traditional fidelity bond where the insured (bonded entity) would be responsible for paying the deductible only in the case of covered claim up to the policy limit.

Penal bond

Is another type of bond that was historically used to assure the performance of a contract. They are to be distinguished from surety bonds in that they did not require any party to act as surety – having an obligee and obligor sufficed. One historically significant type of penal bond, the penal bond with conditional defeasance, printed the bond (the obligation to pay) on the front of the document and the condition which would nullify that promise to pay (referred to as the indenture of defeasance – essentially, the contractual obligation) on the back of the document. The penal bond, although an artifact of historical interest, fell out of use by the early part of the nineteenth century in the United States.https://www.easterninsuranceinc.com