What is a Bond?
First off, bonds are NOT the same as insurance contracts. Insurance only involves two parties (you the policyholder and the insurance company). A bond involves three parties include the following: the guarantor or surety, the principal or obligor, and the obligee or insured.
Principal or obligor: the person who promises to fulfill the obligation and who purchases the bond.
Obligee or insured: the person to whom the promise has been made and to whom the bond is payable in the event the principal defaults on its obligation.
Guarantor or surety: a company who provides the financial backing for the bond penalty. They guarantee the performance of the principal.
How do Bonds Work?
The surety issues a bond on the principal who must perform or not as required. In the event that the contractual obligations are not met, the surety will financially compensate the obligee.
Unlike insurance, surety bonds do not expect to pay for losses. Instead, they guarantee specific duties or obligations will be fulfilled. If the duty is not performed as promised, the surety will pay the bond amount to the person (the obligee) to whom the promise has been made and broken.
A surety bond is written for a set limit and the surety will be liable only for this amount of limit, called a bond penalty.
Example of How a Bond Works
A business owner (obligee or insured) enters into a contract with a construction firm to build an office building by a specified date. The business owner may may require the contractor (principal or obligor) to be bonded to the amount of the project to ensure it is completed. The contractor would purchase a bond from a surety company for a specified amount, which would be payable to the business owner in the event the contractor is unable to meet the specified deadline.
The bond guarantees that if the contractor defaults on the contract, the surety will financially compensate the business owner. The contractor is then responsible for reimbursing the surety company the amount paid under the bond.
Types of Bonds
License and permit bonds: Guarantee that the laws and regulations of a particular profession are followed. They guarantee that the recipient of a permit will comply with the laws, regulations, and ordinances associated with the use of the permit.
Bid bonds: Required by obligees when construction projects are awarded based on the lowest bid. It promise that if the contractor is awarded the contract, they will actually accept the contract and a performance bond will be issued.
Performance bonds: Guarantee that the principal will complete the contract as agreed upon.
Labor and materials bonds: Guarantee that work and materials will be delivered free and clear of any liens or other burdens.
Benefits of being bonded
Being bonded gives issuers the ability to leverage business growth. With the increased stature of having the insurer’s credit rating, a business can feel safer in taking risks to improve and grow the business. A bonded business can obtain unbiased criticism from a credit professional and seek advice in underwriting projects.
Let us help you find the right bond
Pepe Insurance Agency will help you find the right bond for your insurance needs. We will search through the many options available to find what fits you best. Give us a call or request a bond quote today!
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