What Are Surety Bonds?

Surety bonds work as a type of insurance policy for the party requiring the bond, also known as the obligee (in most instances the obligee is a government agency), and are in place to protect the government and its citizens from certain losses.

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How Does a Surety Bond Work?

Surety bonds are legally binding contracts that ensure obligations will be met between three parties:

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Surety bonds work as a form of insurance. If the bond’s requirements are not met, such as not performing contracted work or failing to pay suppliers or vendors, a claim may be filed against the bond. Think of a surety bond as a form of credit to the principal. Whether claims or made by the public or the obligee, they must be repaid by the principal to the surety.

Although the surety backs the bond, you are required to sign an indemnity agreement. This is also known as a general agreement of indemnity, and it includes your business and all owners.

Which Surety Bond Do You Need?

Every business is different, and so it makes sense that not everyone requires the exact same type of bond. In general, three categories of surety bonds exist that may be required as part of doing business. These broad surety bond types include:

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These types of bonds are required for various professionals so that they can operate legally. Auto dealers, licensed contractors, and freight brokers are some examples of professionals required to secure a license or permit bond.

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Individuals or businesses working on public construction projects are likely required to obtain a contractor bond.

These bonds are required by certain courts for a variety of purposes, such as probate or judicial bonds.