A surety bond is required by the government before they grant a license for any business. If the bond owner commits any fraud, the bond company pays to the obligee the amount of damages incurred up to the bond amount.
Here are three things that you need to know about surety bonds:
- Surety bonds are not insurance
It is easy to get confused between insurance and surety bonds, as both are used for loss compensation. Though both are sometimes sold by the same company, bonds and insurance are not the same. Surety bonds do not protect the bond holder, rather, they protect the person you are doing business with (whereas insurance protects the policy holder).
- Surety bonds work like a line of credit
If you fail to finish the work according to the specifications detailed in the bond, the client can claim on your bond and the compensation is paid by the bond company. You will then be required to pay back the surety for the cost. Credit plays an important role in determining your bond premium.
- Surety bonds are a three party agreement
A bond agreement is always between three parties: the obligee, the surety, and the principal.
- The obligee is the one who requires the bond – most often the state or federal government
- The company authorized to underwrite the bond is known as the surety.
- The principal is the one who buys the bond.
Incomplete knowledge is often harmful. When you apply for a bond, you should always go through the details and instructions before signing them.
Bond rules and regulations differ from one state to another, so if you are looking for a surety bond for Florida, make sure to mention your state name when applying for the bond.