When you’re starting a business, navigating the governmental red tape can be an intimidating, tedious task. If your business application requires a surety bond, you might be asking yourself, “What is a surety bond, anyway?” Keep reading to learn more about surety bonds before you buy.
What is a surety bond?
A surety bond is a three-party agreement between:
- The principal�This is the person or entity purchasing the surety bond and agreeing to uphold the terms of the bond.
- The obligee�The obligee is the (usually governmental) entity requiring the purchase of the bond. For example, the New York DMV requires that auto dealer applicants and licensees in the state purchase a surety bond.
- The surety�The surety company provides financial backing for the surety bond, guaranteeing payment to the obligee in the event that the principal violates the terms of the bond.
To put it more simply, a surety bond is a contract in which the principal promises the obligee that they won’t violate the bond’s terms, and the surety company backs that promise financially.
What happens if the principal violates the bond’s terms?
Most surety bonds’ terms are no more than a promise to uphold industry and professional laws. The principal agrees to follow the law and maintain a surety bond as a way for customers or clients to seek reimbursement if any of those laws are violated.
If the principal breaks a law they promised to follow by purchasing and signing their surety bond agreement and causes financial damage to a customer or client, the damaged party can file a claim and seek compensation. If the claim is proven to be valid, the surety will pay the claim up to the bond’s full amount. So, if a $3,000 claim is made on a $10,000 surety bond, that claim is paid by the surety company.
However, it’s important to note that with surety bonds, the principal is assuming all risk�if the surety company has to pay that $3,000 claim, the principal must then repay the surety. You can think of a surety bond as insurance for your customers, protecting them in the event that your business does not adhere to the law.
I’m not going to use a surety bond, so why do I need it?
We’re glad that you don’t have any plans to use your surety bond! It’s a safeguard, a just-in-case precaution that protects the most important part of your business: your customers. If you never use the bond, that’s good for you and your business.
Another important reason you need a surety bond is that having one is probably the law in your industry or profession. You might lose your business license or face fines if you neglect the requirement.�It also serves as an indication to your customers that your business is trustworthy and in compliance with the law.
Now you know what a surety bond is, get in touch with Single Source Insurance today! Get bonded and get the answers to any other questions you might have.