What are Surety Bonds?

What are Surety Bonds?

Most people don’t think about surety bonds unless they are required to have one. At that point the question is asked; what is a surety bond? I will discuss what surety bonds are, the different types of bonds, and the uses of them.

 First of all, please understand, we are referring to bonds in the insurance form not bonds in the investment form.

Surety bonds are similar to insurance but they are not insurance. Insurance transfers the risk from the insured or applicant to the insurance company, whereas, with bonds the risk stays with the insured. This is why bonds are generally cheaper than insurance. With a bond, you are getting a promise to pay from the bonding company. The bonding company or surety will pay when the insured does not but the bonding company will go after the insured to repay what is required of them. In essence the surety company is backing the customer’s promise to pay.

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Bond Terms 

You will see the following terms on a regular basis when dealing with bonds.

Obligee- A person to whom another is obligated or bound. A person to whom a bond is given.

Obligor- A person who is bound to another. A person who gives a bond.

Surety- Security against loss or damage to the fulfillment of an obligation or the payment of a debt. A pledge, guarantee, or bond.

Surety Bond- A bond given to protect the recipient against loss in case the terms of a contract are not fulfilled. A bonding company assumes liability for nonperformance.

Principal- The applicant or the party with the promise to pay.

There are many different types of surety bonds but we will only focus on the most common forms.

Bond Types

A License and Permit Bond is a promise that the principal will comply with all codes as required by the obligee or the entity requiring the bond . The most common type of obligee would be either the county or state. For instance, Mecklenburg County in NC requires a surety bond before an individual can pull a permit for construction.

A Contract Performance Bond guarantees the performance of a written contract by the principal. These types of bonds can include bid bonds, performance bonds, and payment bonds as required by the obligee.

A Lost Title Bond is a requirement of the department of motor vehicles in order to register a vehicle when there is a lost or defective title. These bonds are usually issued for a 3 year term and will protect the obligee if ownership is ever contested. The DMV will tell you the amount of that the bond should be written for based on the VIN number.

A Fiduciary Bond is a person appointed by the court to handle the affairs of a person that is not able to do so. The fiduciary is usually required to be bonded and in the event of the loss the surety would pay the heirs, beneficiaries, or creditors.

There are many types of surety bonds available and we write through several surety companies to handle these requirements. Please contact us at 704-494-9495 should you have any questions or need further assistance.

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