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What is a Surety Bond?

A surety bond is a type of a risk management tool; it's an agreement where the surety (often a large insurance company) provides their financial backing of the principal (the party responsible for fulfilling an obligation) for the benefit of the obligee (the party to whom the principal owes the obligation). All surety bonds have the same basic structure. Unlike a traditional loan or insurance agreement, which typically involves two distinct parties, a surety bond means an agreement between three parties:

  • Principal – This is the party responsible for fulfilling an obligation to complete a specified task or simply to conduct business according to laws and regulations. The principal contacts a bonding company like Viking Bond Service to obtain a bond.
  • Obligee – This is the party owed the obligation from the principal. This party could be the general public who benefits from the principal conducting business per applicable laws and regulations. This party could also be an entity like a government agency that has hired the principal to complete a specific task or project. If an obligee feels the principal hasn't met the terms of the agreement, the obligee may file a claim against the surety bond seeking financial compensation for damages.
  • Surety – This is the party that provides the financially backed guarantee to the obligee, indicating that the principal is capable of fulfilling the obligation. The surety reviews the principal's qualifications for the obligation and obtaining the bond. Once the principal has proven capable of fulfilling the obligation and remedying any breaches in the contract or obligation, the surety will offer to stand in as a responsible party, financially, in the form of a surety bond.

Upon payment of the surety bond premium and issuance of the bond, the surety becomes the initial path of recourse for the obligee in instances where the principal has failed to fulfill the corresponding obligation. In layman's terms, that means the surety will pay the obligee if the principal is unable or unwilling to settle a claim. Afterward, the principal must pay the surety back the full amount of the claims settlement, potentially with additional interest and fees added.

Surety Bond Definition

Simply speaking, a surety bond is defined as a contractual agreement that guarantees certain obligations will be fulfilled. It is a different kind of insurance, as it involves an agreement between three parties.

A surety bond is usually required for licensing or permitting purposes, as well as some court proceedings. They are often used in sectors of the commercial industry, such as transport, real estate and taxation. A surety bond has to be required by some entity. A principal can't get a surety bond just to have one; someone has to require the principal to be bonded. Typically, there will be documentation stating the requirement and the amount needed.

What is a Surety Bond?

How Surety Bonds Differ From Insurance Policies

What are surety bonds, if not just another insurance product? A surety bond is similar to an insurance policy in some ways but has key differences. For example, a claim can be made on a bond to address a failure by the principal to fulfill a covered obligation. This is similar to filing a claim on an insurance policy to resolve a covered negative event. A distinction, however, is that the surety, while verifying the validity of the claim, may seek to remedy the situation by means other than a payout. Another difference is that the surety expects the principal to repay the funds expended to satisfy surety bond claims. In short, with a surety bond, the principal is ultimately responsible to the surety for any funds paid out to satisfy claims.

Surety bonds and insurance policies are similar in terms of the claims process but remain very different in regard to the expectation of losses due to claims. Unlike that of an insurance product, the funds expended to settle a surety bond claim are expected to be recuperated. A surety will seek to collect funds expended on claims from the principal, who is ultimately responsible for funds the surety spent to settle claims on the bond.

Categories of Surety Bonds

The definition and meaning of surety bonds can vary in different areas of licensing and permits. Different states also have unique requirements for paperwork, so there can be hundreds if not thousands of variations of surety bonds. Here are the main categories:

  • Commercial Surety Bonds – These surety bonds vary greatly in type and amount. These bonds are often set as a requirement to obtain licensure or to obtain certain types of permits. These bonds are also used by the judicial system to provide some important protections. Some commercial bonds can be presented in lieu of deposits. Commercial bonds are also used to guarantee payments for certain situations.
  • Contract Surety Bonds – These are surety bonds that are directly tied to a specific contractual obligation. Contract surety bonds are often used in the construction industry. These bonds come in several common forms, such as:

    • Performance Bonds – Covers the principal's obligation to complete the project/tasks covered in the contract. The manner in which the job/project is completed with regard to timeliness and quality is also part of the contractual obligation.
    • Payment Bonds – Covers the principal's obligation to pay subcontractors and suppliers hired to complete parts of the contracted project/task.
    • Supply Bonds – Covers a principal's obligation to supply materials as described in the contract in accordance with any specified deadlines and quality specifications.
    • Warranty & Maintenance Bonds – Covers a principal's obligation to perform maintenance on a completed project as described in the contract.
    • Bid Bonds – Covers the principal's ability to obtain the bonding required by the contracted project. Although bid bonds are used to bid on a project, since a bid bond covers the principal's ability to obtain full bonding for the project, these are typically underwritten as though the principal is seeking full bonding.

How Does a Surety Bond Work?

When sureties issue bonds, they put themselves in a financially responsible position in regard to some covered actions of the principal. In instances where the principal fails to fulfill their obligations, the obligee can file a claim with the surety to seek recourse.

Once the claim is found valid, the surety will typically pay on the claim up to the bond amount. In some situations, bond claims can lead to the surety canceling the bond altogether. A canceled surety bond can jeopardize the principal's relationship with the obligee or the licensing/permitting agency. Typically, if a surety bond is necessary for licensing or permitting, the requirement is active for as long as the license or permit is active. So, it is better for the principal to avoid claims.

How Does a Surety Bond Benefit the Obligee?

To an obligee, surety bonds mean minimizing financial risk when working with the principal on a specific task or project. When a surety executes the surety bond, they are providing a financial backing of the principal to the obligee. For sureties to be comfortable in this arrangement, they underwrite the principal's request via an application, credit check, at times financial statement and other information pertinent to the specific bond request. Through the underwriting process, the surety assesses if the risk of bonding the principal is tolerable before issuing the bond.

This is beneficial to an obligee because it shows that the surety views the principal as an acceptable risk and is willing to back that view by issuing the surety bond. An additional way surety bonds are beneficial to the obligee is the claims process itself. If the principal fails to fulfill the covered obligation, going to the surety directly for damages can be more expedient.

How Does a Surety Bond Benefit the Principal?

Surety bonds provide a clear benefit to the principal over other forms of security. Usually, a surety bond can be obtained by paying a premium for the bond. In some cases, collateral may be required to secure the bond. Other forms of security require the principal to put up assets that can be directly accessed to cover situations that would amount to a claim on a surety bond. Obtaining a surety bond rather than a bank instrument for security can leave these assets free to be used for other things.

An additional benefit to the principal is the claims process. The surety will validate the legitimacy of the claim. Sometimes, the surety may even seek to remedy the situation without paying out on the claim. In contrast to using a bank instrument for security where the funds can be accessed without additional review, funds are only paid out on a surety bond once the claim has been validated, and a payout is deemed the most prudent way to satisfy the claim.

Who Will Need a Surety Bond?

Huge numbers of professionals, businesses, and individuals located across the country will need a surety bond at some point in time. Some require a bond to open their business, while others need one as part of court proceedings. In most cases, a surety bond requirement will be predictable in advance – but not in all cases. For that reason, it's worthwhile for anyone involved in an industry (like construction) that frequently involves surety bond protections to know where and how to get one. Whether or not you need a bond now, it's helpful knowing where to get one when the need presents itself. Having a trusted bond partner for any and all bonding needs makes it much easier to fulfill surety bond requirements without hassle or stress.

How to Apply for a Surety Bond?

Applying for a surety bond begins with filling out an application or reaching out to one of our experts. A standard bond application covers most commercial surety bonds. If a judicial proceeding requires one, you'll need to include the court order for them and information about the proceedings. Different cases may require additional information, and the surety bond agent will inform you about them.

For contract bonds, the process is more in-depth. The application process looks at the principal's ability to complete the contracted obligation, and the requirements may vary from case to case. One additional consideration when applying is the bond form. It provides specific language describing the surety's responsibility to the bond. There's usually a specific bond form for each bond type.

If you're wondering where to get a surety bond, look no further than Viking Bond Service, Inc. Our surety bond agents take pride in providing excellent customer service. Regardless of the type of bond you need, our agents will ensure you know exactly what is needed to obtain the bond and will seek to get you the best quotes and terms for your specific bond request as quickly as they can.

Can You Get a Surety Bond With Bad Credit?

The answer to that question depends on the surety bond service the principal chooses to work with. Some will deny bond applicants with bad credit, viewing them as too big a risk to take a chance on. However, others are willing to work with applicants who have a low credit score or even a bankruptcy on their record. They will likely have to pay slightly higher premiums, but they will not be denied outright, making it possible to fulfill the bond requirement necessary to obtain a professional license or seal a contractual relationship. To locate a surety willing to partner with applicants who have bad credit, work with a nationwide surety brokerage like Viking Bond Service.

Can You Manage Surety Bond Costs?

The short answer is yes – the cost of the bond is determined by the obligee and surety, but as a principal, you can still somewhat affect the costs. The first thing you need to do is find a suitable surety bond agency to hire. Quotes may vary, so you should find a surety agency with a reputation for fair and competitive rates. The other important agenda item is to avoid claims at all costs. A claim is likely much more costly than a bond premium. If you have a bond, make sure you know exactly what behaviors it forbids to minimize the claim risks.

When the surety agency does receive a claim, it's always more economical to settle it immediately rather than allow the surety to settle it. The bonded principal will have to pay the amount of the settlement anyway – to the surety instead of the obligee – but they will have to pay interest and fees on top of it, which can be a substantial added cost. Or the surety might refuse to bond the principal after settling a claim, forcing them to seek out a bond elsewhere or risk losing a professional license or voiding a contract. Either of those scenarios could be catastrophic for a business. It's always less expensive and less risky to settle claims than to dispute them – unless, of course, the claim isn't valid.

The final way to manage surety bond costs is by raising your credit score. Underwriters will factor that higher score into the cost of renewing the bond. Steady reductions in bond costs add up to significant savings over time, especially for people with heavy bonding requirements.

Does the Surety Agency Matter?

The surety agency that issues the bond matters just as much if not more than the surety bond itself. A bond is a static agreement. A surety agency, on the other hand, is a living, breathing organization that can make life easier (or harder) for someone who needs or has a surety bond. Look for several criteria when selecting a surety agency to work with, whether for a one-time surety bond or for a long-term partnership.

An excellent surety agency makes it easy to apply, then jumps into action to deliver a surety bond quote ASAP (ideally within 24 hours). Great agencies will also issue quotes to more applicants, even those with credit scores below 700 or a bankruptcy on their record. And for every person they issue a quote, they do everything possible to keep rates affordable and competitive.

The best surety agencies don't disappear once you obtain the bond. They remain active partners for as long as the bond agreement remains valid. When it gets close to the expiration date for the bond, good surety agencies send out early and action-oriented renewal notifications so that you don't accidentally let bond protections lapse, which could have negative consequences for your business.

The choice of a surety agency matters, but so does time. If you need a surety bond but don't have time to waste, start your search by connecting with one of the country's leading surety agencies – Viking Bond Service.

Connect With Viking Bond Service

For more information about what surety bonds are and how they work, get answers from Viking Bond Service. As one of the country's leading surety brokerages, we have experts on our staff and abundant resources at our disposal, all available to make obtaining a quality surety bond as simple as possible. Submit your bond application today to receive a quote back within 24 hours. If you're not quite ready yet, contact our team through the contact form on this page or by calling 1-888-2-SURETY (1-888-278-7389).

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