If you’re a business owner, you might not be aware of the intricacies behind surety bonds. Relying on our years of experience helping clients purchase business insurance coverage policies, The Kastendike Insurance Group specializes in helping business owners understand the importance of surety bonds.
What Are Surety Bonds?
Surety bonds represent a promise to be held accountable for another party’s debt, default, or outright failure. It involves three parties: one party, known as the surety, fully backs the performance guarantees or obligations of the second party, (known as the principal) to a third party (referred to as the obligee). In other words, surety bonds hold contractors and vendors accountable for their agreed-upon work.
Surety bonds fall into two primary categories: contract surety bonds and commercial surety bonds.
What Are Contract Surety Bonds?
Contract surety bonds pertain to construction projects. In these cases, the project owner or manager hires a professional contractor to fulfill a construction contract. The contractor goes through a surety bond producer to obtain a surety bond. If the contractor fails to finish the job, the surety company has to find a replacement contractor to finish. If the surety company can’t do that, they have to compensate the project owner for the financial loss incurred.
Types of contract surety bonds include:
- Bid Bond: A bid bond gives the project owner financial protection if a bidder gets the contract but either doesn’t sign the contract or fails to provide the required performance and payment bonds.
- Performance Bond: A performance bond guarantees the owner that the contractor will meet the contract’s performance requirements.
- Payment Bond: A payment bond ensures that subcontractors and suppliers receive compensation based on the contract’s terms.
- Ancillary Bond: An ancillary bond works in conjunction with performance bonds and ensures that the contractor agrees to repairs following construction.
What Are Commercial Surety Bonds?
Commercial surety bonds ensure that businesses meet requirements for a variety of tasks and operations. Federal, state, and local governments—as well as various other entities—require that businesses and individuals have these in place.
Types of commercial surety bonds include:
License and Permit Bonds: License and permit bonds hold individuals and businesses with licenses and permits accountable for operating within the boundaries of their designations.
Court Bonds: Court bonds ensure that individuals and businesses comply with written court orders.
Subdivision Bonds: Subdivision bonds promise that the developers will hold true to their contractual agreements when developing land.
Questions About How Surety Bonds Relate to Your Business?
The Kastendike Insurance Group is well-versed at answering clients’ questions regarding commercial and contract surety bonds and how they apply to organizations. Call us today at 443-501-9388.