What Are Surety Bonds?

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A surety bond is a contract between three parties: principal, obligee and surety. Under the bond, the surety promises the obligee that the principal will act per the terms of the contract. There are many types of surety bonds that are common in the business and professional world. Bonds are a means of ensuring ethical and professional conduct.

There are three parties in a bond:

Principal:The principal is the party required to buy the bond and is usually a business or a professional who requires the bond to operate. According to the bond, the principal must act per the contract.

Surety: This is the party that acts as a guarantor, ensuring the obligee that the principal will perform their contractual obligation. The surety is usually an insurance or surety company that sells surety bonds.

Obligee: This is the party that is the recipient of the bond. It is usually a government body and the bond is usually a requirement to issuea contract or a license.

How does it work?

If you are a professional or someone running a business, you may be required to buy a surety bonds Georgia as a condition of your licensing or registration. Some bonds, such as a bid bond or performance bond, are also required to bid on a contract. The bid bond is usually demanded by an authority, such as a state licensing body. You can buy the bond from a surety company.

An underwriter for the surety will conduct a background check to ensure you are a good risk. This usually includes factors like past performance, business capability and financial stability. In short, the underwriter will ascertain whether you can maintain your contractual obligation. For a surety, a background check is critical to protect their obligation.

Types of surety bonds

There are many types of surety bonds; however, here are four types of surety bonds Georgia:

  • Contract bonds:These are bonds that are usually required in the construction industry.
  • Commercial bonds: There are many sub-types of commercial bonds. It ensures that a bonded company or professional follows industry rules.
  • Fidelity bonds: Protect companies from employee misconduct.
  • Court bonds: Court bond is a general term used for all surety bonds that are needed by individuals when they are involved in pursuing an action through a court of law.

 

Infographic: Types of Surety Bonds

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The Infographic, “Surety Bond Companies: Types of Surety Bonds,” explains the various types of surety bonds and why they are useful.

One of the primary purposes of a surety bond is to protect project owners when hiring a contractor. The process usually begins when the project owner opens their project open for bidding. The contractor files for a Surety Bond from a surety company to assure the obligee (the project owner) that they have the resources available to complete the project.

If for any reason, the project is not completed according to the terms of the contract, then the obligee will be compensated for the amount promised in the Surety Bond. For more information on the process, refer to the infographic below.