Surety bond


Surety bond

A surety bond is a contract among at least three parties:
* The principal - the primary party who will be performing a contractual obligation
* The obligee - the party who is the recipient of the obligation, and
* The surety - who ensures that the principal's obligations will be performed.

Through this agreement, 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 guarantee performance and completion per the terms of the agreement. Contract bonds guarantee a specific contract. Examples include performance, bid, supply, maintenance and subdivision bonds. Commercial bonds guarantee per the terms of the bond form. Examples include license & permit, union bonds, etc.

Suretyship bonds originated hundreds of years ago as a mechanism through which trade over long distance could be encouraged. The first corporate surety firm in the United States was United States Fidelity and Casualty Company of New York, established in 1880. According to the [http://www.surety.org Surety & Fidelity Association of America] annual US surety bond premiums are 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 bonds.

Surety bonds are frequently used in the construction industry: in order to obtain a contract to build the project, the general contractor (and often the sub-contractors as well) must provide the owner a bond for its performance of the terms of the contract. Conversely, owners and contractors may also provide payment bonds to ensure that subcontractors and suppliers are paid for work done. Under the Miller Act, payment and performance bonds are required for general contractors on all U.S. federal government construction projects where the contract price exceeds $100,000.00.

Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.

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.

If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both.

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 it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.

A bail bond is a type of surety bond used to secure the release from custody of a person charged with a criminal offense. Under such a contract, the principal is the accused, the obligee is the government, and the surety is the bail bondsman, and if the accused fails to appear, a fugitive recovery agent is the surety.

Examples

Examples of Surety Bonds:
* Bid Bond
* Performance Bond
* Advance Payment Bond
* Retention Payment Bond
* Maintenance Bond
* Contractor License and Permit
* Court
* Customs
* Lost Securities
* Money Transmitters
* Mortgage brokers
* Motor Vehicle Dealers
* Notary
* Patient Trust Funds
* Public official
* Tax bonds
* Subdivision
* Utility deposit
* Wage and Welfare/Fringe Benefit (Union)
* Public Warehouse
* Supply bonds
** Online Transaction Supply Bonds
* Self–Insured Workers compensation
* Insurance Company Qualifying
* Reclamation

Examples of fidelity bonds:
* ERISA
* Business Service Bonds
* Public Official
* Manufacturers
* Small Businesses
* Non-Profit Organizations
* Real Estate Managers
* Title Agents
* Financial institutions
* Precious Metal Exposures
* Armored Car

License and permit bond

"License and permit bonds" are a general class of surety bonds required of a person or entity to obtain a license or a permit in any city, county, or state. These bonds guarantee whatever the underlying statute, state law, municipal ordinance, or regulation requires. They may be requirements for a licensed driver to be present in the vehicle; for example, Judy is a licensed driver and her guardian is anywhere in the automobile, not necessarily in the front or back. Certain taxes and fees and providing consumer protection may be required as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.

See also

* Co-signing
* Fidelity Bonds
* Fiduciary
* Indemnity
* Insurance
* Performance Bond
* Submittals (construction)
* Shop drawing
* Testator

External links

* [http://www.fms.treas.gov/c570/c570.html Circular T-570] - List of federally licensed bonding companies approved by the US Treasury.
* [http://www.sio.org/private/fprivate1.html SIO] - Surety Information Office.


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Look at other dictionaries:

  • surety bond — ➔ bond * * * surety bond UK US noun [C] ► LAW a legal agreement in which someone promises to pay a person or organization a sum of money if another person does not do something they had promised to do: »Contractors are not required to post a… …   Financial and business terms

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  • surety bond — noun a bond given to protect the recipient against loss in case the terms of a contract are not filled; a surety company assumes liability for nonperformance • Syn: ↑performance bond • Hypernyms: ↑bond, ↑bond certificate * * * noun : a written… …   Useful english dictionary

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  • surety bond — noun Date: 1911 a bond guaranteeing performance of a contract or obligation …   New Collegiate Dictionary

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