Depending on your industry, surety bonds may or may not be familiar to you.
Some people confuse the phrases bond and insurance. In truth, they are very unlike.
What are surety bonds, exactly? This article will cover all you need to know about surety bonds and the businesses that use them.
It is a legal requirement.
Whatever services your company offers, you’re well aware that following industry-specific standards created for your business is a legal necessity.
From tax laws to safety regulations, you must know all you need to run your business legally. In many sectors, a surety bond is one of these criteria.
What Is A Surety Bond, Exactly?
A surety bond is a three-party contract that ensures the fulfillment of a legally enforceable financial commitment. The three parties engaged are as follows:
Principal
The primary is the entity that buys the bond to assure that it will fulfill its commitments to others.
Obligee
The obligee is the party who needs the principal to get a surety bond to protect themselves financially.
Assurance company
A surety company is a third-party entity that neither provides nor demands a bond. A surety firm aims to give financial assurance that the obligee will fulfill their contractual commitments.
With this in mind, it’s easy to see how vital surety bonds are in preventing fraud and malpractice among consumers, suppliers, and state agencies.
Before issuing a license to the principal, the obligee (usually a government agency) generally requires a surety bond.
In other cases, the objective of the surety bond is to ensure that the principal keeps their part of the contract.
These words might allude to a job’s completion date, the quality level to which it must be completed, or the adherence to industry norms and ethical values.
The surety bond business undertakes to reimburse the damaged party if the principal breaches the bond’s requirements. Each surety bond includes a penalty sum, which is the most the surety firm will pay the obligee.
That isn’t to argue that the principal isn’t accountable. The principal is still liable to the surety business for the entire amount outstanding.
Do I Need a Surety Bond?
The following industries often employ surety bonds:
- Automobile Dealers in the Transportation
- Construction
Auto dealers must get a surety bond before receiving their motor vehicle dealer license, which assures that their dealership will follow industry regulations.
The following are some of car dealers’ most common surety bonds.
Motor Vehicle Dealers’ Bond
Auto bonds guarantee that a vehicle dealership observes the law. Auto bonds protect both purchasers and creditors against dealer fraud or unethical behavior.
Registration Service Bond
This kind of bond assures that businesses are authorized to provide DMV services legally and ethically.
In several jurisdictions, private businesses have contracts with the DMV to handle administrative services such as vehicle registration.
A company must first get a license to perform such a service, which they cannot do without first acquiring a registration service bond.
Bond for Certificate of Title
This bond guarantees the legal validity and ownership of a vehicle’s title. If the original title has been lost, stolen, or destroyed, it is usually essential to register the vehicle with the DMV.
Rather than an auto dealer, the automobile owner usually purchases the certificate of title bond.
Industry of construction
The construction industry heavily influences the surety bond market. Contract bonds are fairly common in the construction industry. Construction bonds are another name for them.
What kind of construction bonds are there?
Bond for Contractor’s License
A contractor license bond ensures that the contractor follows all applicable laws and contractual obligations.
Construction or contract work bonds
One of the most popular surety bonds issued in the United States is the contract or construction bond. They ensure that a contractor will carry out his or her responsibilities.
Paying subcontractors and suppliers, for example. Most contracts provide that any flaws discovered after the service must be resolved.
Security Bond for Right of Way
A right of way bond ensures that a contractor working on public infrastructures, such as a road or highway, complies with all applicable local laws and regulations.
Industry of transportation
Let’s look at the most prevalent types of transportation surety bonds.
Bond for Freight Brokers (BMC-84)
Before obtaining or renewing their license, freight brokers must post a bond. The freight broker bond protects motor carriers and shippers against fraud and late payments.
Permit Bond for Overweight and Oversize
Overweight and oversize permits are bonds that guarantee that a freight carrier hauling freight exceeding a certain gross weight or size will pay the relevant taxes and will not cause any harm to streets or roads.
Security Deposit for Driving School
A specific driving school bond is necessary to ensure that driver-ed schools follow the law.
Personal Property Bonds
Did you know that a bond must ensure that a moving business adheres to state regulations and fulfills its contract? A home goods bond is what it’s called.
Final Thoughts
Surety bonds are required in high-risk enterprises where all parties must be safeguarded against fraud and misconduct.
Furthermore, the law may compel you to get a surety bond before you may start a business in specific cases.
As a result, both business owners and consumers benefit from having accurate information on surety bonds. Thanks to this article, you now have a better understanding of surety bonds and how they’ve been used in various sectors.
