Surety bonds can be complex. It�s understandable that we get many questions about bonding requirements and the underwriting process. To help answer some of the most common questions, we�ve put together a comprehensive FAQ. If you would like to request a quote or need any help with answering your questions, contact an Single Source Insurance agent today!
What’s The Purpose of a Surety Bond?
A surety bond serves as a guarantee that the party requiring the bond (the obligee) will not suffer a financial loss as the result of the actions of the party purchasing the bond (the principal). The bond is a legally binding contract that spells out the specific things the principal must and must not do to avoid claims being filed against the bond.
How Does a Surety Bond Work?
A surety bond is a legally binding contract among three parties: the obligee that requires the bond, the principal that purchases the bond, and the surety that underwrites and issues the bond. The bond contract specifies the terms and conditions the principal must abide by so as not to incur claims against the bond. It also specifies the maximum amount that will be paid out on any claim.
Some people aren�t clear on the difference between insurance and surety bonds. Both provide protection against the risk of financial loss. However, when you buy insurance, you are the one protected. When you buy a surety bond, it�s the obligee (the party requiring the bond) that is protected against loss. The individual purchasing the bond, the principal, is ultimately responsible for paying out on valid claims.
Can Anyone Get a Surety Bond?
Surety bonds are required for a wide variety of purposes, but in most cases, a surety company�s decision to issue a bond is based entirely on the applicant�s personal credit score and financial resources. Even people with bad credit can usually get bonded, though they will likely pay a higher premium rate than someone with good credit.
Note that some bonds guarantee that the principal will uphold certain professional or industry standards or abide by certain regulations. In such instances, the surety company may also take into consideration the applicant�s industry experience and past performance.
Do I Need a Surety Bond?
People typically purchase a surety bond because they are required to do so as a condition of obtaining or doing something they want or need. Here are common examples of when a bond is required:
- License and permit bonds are required as a condition of becoming licensed in a certain profession or operating a certain type of business (e.g., a contractor license bond or an auto dealer bond).
- Contract bonds are required in order to be awarded a contract to perform a specific type of work, most often in the construction industry (e.g., a performance bond).
- Court bonds are required by a court to either secure contested property in a civil lawsuit or to guarantee that an individual will live up to certain fiduciary responsibilities (e.g., an attachment bond or a probate surety bond).
The obligee requiring you to purchase a surety bond will let you know what type of bond is required.
What Happens When a Claim Is Filed?
Any violation of a surety bond contract by the principal can trigger a claim, which the surety will investigate. If a claim is found to be valid, the surety will attempt to negotiate a settlement, but if an agreement cannot be reached, the surety typically pays the claim. However, this payment is essentially an advance to the principal, who is legally responsible for paying claims. The principal must subsequently reimburse the surety in full.
Do Surety Bonds Expire?
Every surety bond expires eventually if it is not renewed. The question is, how long does the obligee require a surety bond to be in place? Here are some examples:
- A contractor payment bond for a project that will be completed within a year might have a bond term of one year.
- A car dealer�s license bond in a state where the dealer’s license must be renewed every two years might have a bond term of two years, with an expiration date that coincides with the license expiration date.
- Other bonds. Some bonds may need to be in place for a significant period of time, such as a court bond for someone serving as a guardian for a minor or custodian for an incompetent adult.
At the end of the bond term, a bond must be renewed or extended. Some bonds are not renewable, and in such cases, a replacement bond must be purchased.
Are Surety Bonds Refundable?
Under certain circumstances, some surety bonds may be refundable. If a refund is permitted, it�s generally shortly after the bond was purchased.
There are a number of reasons why a person might request a refund on a surety bond. For example, someone purchases a contractor�s license bond after taking the examination required as part of the licensing process. A few days later, they learn that they failed the exam and decide to spend the next year preparing to retake the exam. Since they can�t obtain a license yet, they want a refund on the bond, which the surety company may or may not grant.
There are no hard and fast rules about refunds on bonds, and surety companies can exercise their own discretion in such matters. Generally at the time a bond is purchased, it is considered to be �fully earned� for the first year of the bond term, so mid-year refunds are rare. However, if you purchase a bond with a multiple year term and pay the premium up front for all years, then find before the end of the first year that you don�t need it any longer, you may be able to get a refund for the premiums paid in advance for year two and beyond. Speak with an agent for assistance.
How Often Do You Pay For A Surety Bond?
Unlike insurance premiums, which typically can be paid monthly or quarterly, surety bond premiums are generally paid in full at the time of purchase. For bonds with a term of only one year, that�s usually not a financial hardship for the purchaser. However, premiums for guardianship bonds and custodian bonds required of people caring for minors must be paid in advance for the number of years remaining until the minor reaches age 18. So a guardian of a four-year old child will have to pay the premium for 14 years of coverage at the time a guardianship bond is purchased.
Surety bond companies may agree to finance surety bonds with annual premiums above a certain amount, typically $1,000 or $1,500. The purchaser must meet certain financial criteria, and the bond must be cancellable, so that the surety can cancel it if the purchaser fails to make payments as called for in the financing agreement.
How Do I Get A Surety Bond?
The process of applying for a surety bond is rather simple, and most companies that sell surety bonds offer the ability to apply for a bond online. The hard part is choosing the right surety company.
Get a surety bond online from Single Source Insurance, and get on with business. We are licensed across the country and offer a comprehensive selection of the best performance bonds and surety bonds at the best prices to keep you in compliance with all of your industry regulations.
How Long Does It Take To Get Bonded?
When you apply for a surety bond online, you can often get approval immediately, as long as you have provided all of the information the surety needs and you meet all of the approval criteria. The time it takes for your bond to be issued once your application has been approved will depend on how quickly you pay the bond premium and return a signed copy of the bond agreement. Once those tasks have been accomplished, you should have the bond certificate within a day or two.
What’s The Difference Between a License Bond and a Contract Bond?
There are different bonds for different purposes. License bonds and contract bonds serve two very different purposes.
Purchasing a license bond is a prerequisite for obtaining a license to do business in a given state. License bonds are required for a number of professions and businesses, and the list varies from state to state. Two common example are auto dealer license bonds and contractor bonds. A license bond guarantees that the bonded individual (the principal) will conduct business in accordance with all applicable laws, regulations, and industry standards. It protects the state and consumers against financial loss stemming from the principal’s unlawful or unethical actions.
A contract bond guarantees that the bonded individual, often a general construction contractor, completes a project in accordance with all contract terms and specifications. It protects the project owner, often the state agency sponsoring a public works construction project, against financial loss resulting from the principal’s violation of any contract terms and conditions, including defaulting on the contract and failing to complete the project.
What Is A Fidelity Bond?
A fidelity bond protects business owners from financial loss resulting from the dishonest or fraudulent acts of employees. The two main types of fidelity bonds are business services bonds and employee dishonesty bonds.
Businesses that send employees out to do work at a client�s location, such as house painters, cleaning services, and landscapers often voluntarily purchase a business services bond. A business services bond provides protection against financial losses due to the theft of or damage to the client’s property by an employee while on the client’s premises. Buying this type of bond can give new clients the confidence to hire you and gives you an advantage over non-bonded competitors.
An employee dishonesty bond protects a business owner against losses due to theft, fraud, embezzlement and similar dishonest acts committed by one or more employees. It can be a blanket bond that covers all employees, or it can designate only specific named individuals.
Can I Get a Bond If I Have Bad Credit?
Yes, you can. Nearly all surety bond companies offer bad credit programs. You may pay a higher rate than you would if you had good credit, but you should be able to get the bond you need.
What Is Personal Indemnity?
Virtually all surety bond contracts include a personal indemnity clause. Signing it makes you legally liable to reimburse the surety company for any claims or other costs they pay on your behalf. This indemnity clause is also commonly known as a �hold harmless� agreement.
Do Court Bonds Require Collateral?
Due to the large sums of money often involved in situations requiring court bonds, collateral is often required in order to purchase a bond, especially if the person applying for the bond has bad credit. The collateral must be equal to 100% of the required bond amount.
Collateral can be in the form of cash or an irrevocable letter of credit. Real estate and other assets that cannot easily be liquidated are not accepted by a surety company as collateral. However, a bank might accept such illiquid assets as collateral for an irrevocable letter of credit that would meet the surety company’s collateral requirements.
What Should I Note As My Effective Date?
The effective date of a surety bond is the date that it becomes active. There is no coverage for losses incurred prior to the bond�s effective date. The obligee requiring you to purchase the bond should tell you what the effective date must be. In the case of a license bond, the effective date must be prior to the issue date of the license.
How Do I Know The Bond Amount I Need?
The bond amount is established by the obligee requiring you to purchase the bond. It is also referred to as the penal amount of the bond.
What’s The Difference Between Surety Bonds & Insurance?
Insurance provides financial protection for the person that purchases it. An insurance policy transfers financial risk from the insured to the insurer.
A surety bond protects the obligee that requires its purchase. It transfers financial risk from the obligee to the person purchasing the bond (the principal).
What If I Have Another Question?
At Single Source Insurance, our surety bond experts will gladly address these and any other questions you may have. Contact us today for assistance.