Things to Know About Surety Bonds

A surety bond is a written agreement between parties to ensure that a particular task gets completed, payment gets made, or some other form of compliance. People and companies buy surety bonds for various reasons. An individual who hires a contractor to build a home may get a construction surety bond. Some professions require a surety bond to hold a professional license, such as auto dealers, private investigators, and mortgage brokers. Surety bonds are issued for a set term, usually one to three years. They may also operate as continuous bonds, which means they remain in effect until canceled by the surety.

Who Are the Parties In a Surety Bond?

A surety bond is unique among insurance policies because it involves three parties.

  • The principal is the entity that promises to perform a particular function and purchases the surety bond to guarantee that performance.
  • The obligee is the party that expects to receive service and requires the principal to purchase the surety bond. The obligee is the beneficiary of the assurance.
  • The surety is the insurance company that puts up the indemnification and pays the obligee if the principal fails to perform.

What Are Court Surety Bonds?

As the name suggests, a court surety bond is a kind of surety bond that a court may require. Plaintiffs, defendants, guardians, administrators, and executors may need surety bonds in local, state, or federal courts. A court uses a court surety bond to make sure that the parties follow the court’s orders. Judges may also order a surety bond to allow for a particular action before the case reaches final adjudication. If the court determines later that allowing that action was incorrect, the other party has an available financial remedy through the surety bond.

Two prevalent types of court surety bonds are appeal surety bonds and fiduciary bonds.

  • Appeal surety bonds help ensure that the original judgment gets paid if the appellant loses an appeal.
  • Fiduciary bonds are surety bonds that ensure an individual fulfills a particular obligation, such as serving as an executor, guardian, or conservator. 

What Are Contract Surety Bonds?

Contract surety bonds are the most common type of surety bond. They are especially familiar to people who work in the construction industry, where bid, performance, and payment bonds are part of the day-to-day flow of business. Surety bonds are becoming more common in fields other than construction. Retail businesses, trucking companies, security organizations, and landscaping entities are just a few industries where you’ll find contract surety bonds.

How Do I Get a Surety Bond?

The first step is determining what kind of surety bond you need and what value you need to cover. Each type of surety bond comes with its own underwriting requirements, so you’ll need to gather whatever documentation you need for your situation. While every situation is unique, some of the standard requirements may be proof of attorney representation, financial statements in business cases, character references, proof of financial health, personal and business credit reports, and an explanation of any prior surety bonds.

Surety bonds are useful tools for individuals and businesses when one party needs assurance that another party will perform. These unique, three-party agreements are a win for all involved when properly drafted and executed.