What Are Surety Bonds?

If you think of surety bonds as some pretty recent product of the ever-growing market that surrounds businesses, you are wrong. They have been around for ages, some even found traces in ancient cultures.

Right now there are Commercial Surety Bonds and Contract ones that can be used. Here are a few details about each of them.

Commercial Surety Bonds
They guarantee that the principal will perform according to the stated obligations. These bonds include bonds for license and permit, judicial and probate, public official or various other different bonds.

Commercial Surety bonds guarantee the performance of third parties’ duties: fiduciaries, public officials, providers, immigrants. License and permit bonds are required by regulations to operate a business.

Contract Surety Bonds
They mainly refer to projects related to constructions and assure the project owners that the contractor will perform its duties concerning payment of the other third parties such as suppliers or subcontractors and service delivery.

Contract Surety Bonds involve bonds such as bid bonds, maintenance bonds, subdivision bonds or performance bonds. All of them work as financial assurances against unforeseen events caused by lack of compliance with terms and conditions. The purpose of each bond is clearly specified and allows a smooth flow of operations.

Many big U.S. companies require various kinds of surety bonds such as The Airline Reporting Corporation. Surety bonds are considered to be three party transactions for forms of insurance.

Here are the three parties:
1. The Principal – the contractor – taking the bond as guarantee for an obligation
2. The Obligee – the project owner – the surety makes the guarantee to the oblige for the principal
3. The Surety – will pay the oblige when the principal fails to respect an obligation

Of course, there are differences between surety contracts and insurance policies. Surety bonds are somehow similar to banking processes so a win-win relationship on the long-term with a specialized firm can prove to be really beneficial.