Depending on the part of the world you live in, you will have encountered different mechanisms through which service providers are “encouraged” to provide exactly the kind of service they said they would. One such mechanism are surety bonds which companies need to take out in order to be legally allowed to provide a certain service.
The Basic Surety Bond Relationship
Every surety bond relationship will involve three parties. The first is the principal, the company or the individual that will perform the service as agreed upon in the contract. The second party is the obligee, a government agency that requires a bond as a way of protecting the government and the citizens. The third party is the surety, the organization which sells surety bonds and guarantees that the principal will perform the contractual obligation towards the obligee.
For example, if you wish to build an annex to your house, you will be the obligee and hire the principal (the contractor) who will be bonded by the surety. When they are bonded, you know that they will provide the advertised service and if they don’t, the surety will pay to have the service provided by someone other. In essence, surety bonds are a promise that protects the customer.
From a Business’ Point of View
In case you are a business and need to have a surety bond to provide services, you will have to approach a surety bond company who will sell it to you. You will either pay them an annual premium or a one-time fee for specific one-off projects. In return, they will issue you with a surety bond that will guarantee to your potential customers that you are a bona fide, reputable service provider.
Depending on where you live, you will have to find out which types of businesses and contracts require surety bonds.
While it may seem like just another expense, surety bonds are actually a good thing for companies as well. For one, the fact that you are bonded and someone else isn’t immediately indicates that this someone else is not working legally. Potential customers will know that you are a reputable company. Also, the surety bond company that sold you the surety will always take your side in case your customer is dissatisfied with the service you provided and decides to take things to court.
And surety bond companies have some serious legal representation, you can rest assured.
Different Types of Surety Bonds
Surety bonds are divided into three major types – contract surety bonds, commercial surety bonds and business service bonds.
Contract surety bonds are most commonly used in the construction industry. For example, when a construction company of any kind is hired by any branch or level of the government for a certain job, they will need to take out a contract surety bond. Even before they are awarded the contract, they need to have a bid surety bond which ensures they are a bona fide candidate for the contract. Other types of contract surety bonds include performance, payment and maintenance bonds.
Commercial surety bonds are usually required by the state as a way to guarantee that a company will provide their service in a way that conforms to the laws and the regulations of that state. Plumbers, brokers, insurance agents, electricians and even car dealers are often required to be bonded in order to be able to provide their services. There is also a special type of surety bonds that fall under commercial ones that guarantee that treasurers and judges will not be corrupted.
Business service bonds are probably the least common of the three types and they mostly appear in industries where company employees visit customers’ homes. For instance, if you run an agency that provides home care services, you will need to have a business service bond that will guarantee that your employees will not steal from customers’ homes.
All three of these types have at least a few subtypes and if you run a business or are thinking about opening one, you will do well to inform yourself about these. Also, you will want to find a reputable surety bonds company that will go out of its way for you.
Instead of a Closing Word
We will leave you with an fun fact – something resembling surety bonds appears in the first recorded law code in human history, the Code of Hammurabi from the 18th century BC.
So, definitely not a recent invention.