Surety Bonds

guarantees an obligation.

While fidelity bonds operate much like insurance, surety bonds adhere more strictly to the concept of suretyship; the surety lends its name and credit to guarantee an obligation made by one party (the principal) to another (the oblige). As result, the surety must understand the needs of the obligee and carefully analyze the abilities of the principal to fulfill these needs.

Surety bonds are called upon to guarantee numerous, different contracts. In general, surety bonds can be divided into six main categories:

  • Court;
  • Contract;
  • License and Permit;
  • Public Official;
  • Federal;
  • Miscellaneous.

Court Bonds (also known as judicial bonds) are required in court proceedings and fall into two categories:

  • Fiduciary;
  • Litigant;

Fiduciary bonds are required of someone put in a position of trust by the court.

For example, administrator bonds are a type of fiduciary bond designed to guarantee the activities of an administrator, a court-appointed fiduciary required to distribute the assets of an individual who dies without a will.

Litigant bonds may be required of a plaintiff or defendant in a court case to guarantee the payment of damages that might be awarded the other party or court costs.

Contract bonds, as their name suggests, are used to guarantee the performance detailed in a wide variety of contracts. They are used for contracts involving construction, repair, maintenance and material supply.

For example, a contract bond is often required to guarantee the performance of a contractor. If the contractor fails to perform according to the specifications of a given contract, the surety is responsible to the obligee (the party for whom construction is being done) up to the penalty amount (bond amount). The surety would then seek reimbursement from the principal (contractor).

A Bid bond guarantees that a contractor will enter into a construction contract if it is available to him/her. If the bidder fails to accept the contract in question or cannot provide a performance bond, the bond will pay the difference between its bid amount and the next lowest bid.

A performance bond guarantees faithful performance of the terms of a contract. If the bidder on a construction contract wins the bid in question, he/she will be required to provide a performance bond. If this contractor fails to perform the construction job as required, the performance bond will pay up to its penalty for any excess costs.

Finally, a labor and materials bond guarantees that the principal will pay for all labor and materials associated with a given contract. In this way, the obligee can be assured that there will be no liens following the conclusion of a project.

License and Permit Bonds

Often are required by local or state agencies of individuals before they can engage in certain business or professional activities. These bonds are designed to indemnify the government agency involved against liability arising out of the issuance of the license or permit in question.

Public Official Bonds

Are designed to guarantee the performance of public officials for the protection of the public which they serve.

The “performance” in question of a public official includes the handling of money and other property connected with the performance of his/her job.

Federal Bonds

Are designed to insure payment of duties and taxes and/or guarantee compliance with federal government regulations.

Federal bonds include:

  • Immigrant bonds;
  • Internal revenue bonds;
  • Custom bonds.

Miscellaneous Bonds

Encompass the hundreds of surety bonds that do not fall neatly into the preceding five categories such as:

  • Income tax bonds;
  • Blue sky bonds.