A surety bond is uncommon to most people, but for many business owners, it is a necessity. While confusing, think of it as insurance to perform a particular task or fulfill an obligation. However, it differs significantly from the standard policy coverage. Below is more information about this coverage, to help you understand it.

What Is a Surety Bond?

Unlike the two-party agreement under a traditional insurance policy, a surety bond is a legally binding contract involving three parties—the surety, principal, and obligee. The principal is the person or business taking out the bond. The surety ensures that the principal will meet the requirements that the obligee, or customer, sets for them. If the principal fails to do so, the obligee files a claim on the bond, and the surety must pay the financial damages. However, the principal is not free from liability—they must settle their dues on the claimed amount with the surety company.

For an example of how a surety bond works, consider the following scenario. A project owner, identified as the obligee, will hire a general contractor for work. As a guarantee that the hired party will meet the contractual obligations, they—as the principal—purchase a bond from a trusted provider, known as the surety.

How to Know When It’s Necessary

There are two general types of surety bonds—contract and commercial. Contract surety bonds are often necessary for construction work, wherein the principal’s obligations involve following the contractual terms and conditions. The most common claims made on the surety bond include failure to meet deadlines, incomplete or substandard output, and breach of contract. 

Commercial surety bonds cover a broader range of responsibilities, including compliance with business licenses, permits, and duties. They protect the public, in this case, the obligee, against questionable practices. For instance, notary public, banks, auto dealers, liquor and tobacco sellers, mortgage brokers, and general contractors must have surety bonds to be in business.

Who Issues Surety Bonds?

Most surety bond providers are insurance companies who are financially capable of providing the guarantee in the contract. However, some brokers sell surety bonds from different insurers. If you’re looking for one, check if their bonding license applies to your location. Examine their offerings—do they have the category of surety bond you need? Some providers specialize in a particular type, especially for court or judicial bonds. 

Learn more about surety bonds from the insurance professionals at Stautberg Financial Group in Cincinnati, OH. With over 30 years of experience, they are a full-service insurance agency that serves the Tri-State area, providing an extensive range of coverage for businesses. Call (513) 821-6300 to request a quote. Learn about their insurance options online.