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Surety Bonds: The Breakdown

Surety bonds are an insurance-like contract between three parties: the principal (you), the surety (us), and the obligee (the entity needing the bond). A surety bond financially guarantees the principal will act in compliance with any bond terms or laws. In other words, surety bonds make sure certain requirements and guidelines are met. When the three parties come together, they sign a legally binding contract to achieve that goal.

What Is a Surety Bond?

The principal, or the person/business, purchases the surety bond to guarantee their work performance. The obligee is the entity needing the bond, typically for regulation purposes. Obligees are oftentimes government agencies, who typically require surety bonds to reduce potential financial loss. 

The surety is the bonding agency, or the company supporting the bond. The surety essentially acts as an insurance in case the principal doesn’t meet their obligations. If the principal does happen to fail, the obligee makes a claim to recover any financial losses. If the claim is legitimate, the insurance company will pay reparations to make up for those losses. However, the payment doesn’t exceed the bond amount.

How Do Surety Bonds Work?

Surety bonds are typically used by businesses, entrepreneurs or professionals who provide services to consumers. Traditionally, bonds regulate markets considered risky—like mortgages. Most of the time, surety bond transactions are one of three major bonding categories: commercial bonds, contract bonds, and court bonds.

1. Commercial Bonds

Commercial bonds are the most common surety bond. A more familiar term would be a “license and permit” bond. These are used by business owners, entrepreneurs, or any other working professional offering services to the public. Commercial bonds are typically required for car dealers, collection agencies, mortgage brokers, freight brokers… you get the idea.

Commercial surety bonds guarantee that any individual or business acts in compliance with industry rules or regulations, per their business license. In fact, they’re often a requirement before getting a business license.

2. Contract Bonds

Contract bonds are just that—contract bonds. They guarantee that a contractor will complete a project correctly, in compliance with state and federal regulations. This also applies to any and all terms explained in the contract.

Contract bonds protect not only the state or government, but any parties working with the contractor. This includes any labor workers, subcontractors, or suppliers.

3. Court Bonds

Typically, court bonds are used for guardianship or estate cases. Court bonds give the court a guarantee that any estate or assets will be handled correctly. In some cases, individuals wanting to appeal a court ruling may require a court bond.

What If a Bond Agreement Is Violated?

If the principal ends up failing to meet the obligations and violates the bond agreement, the obligee can file a claim against the bond to receive compensation. The surety would then be obligated to pay the obligee for any losses or damage. However, when it comes down to it, the principal (you) is ultimately responsible for the cost of the claim.

How Much Is a Surety Bond?

In order to get bonded, the person or business must pay a fraction of the total bond amount. This amount is referred to as the bond premium.

How much a surety bond premium costs depends on a number of factors, the most important being the applicant’s credit score. Other major factors that influence a bond premium include:

  • Personal and business financial statements
  • Assets and liquidity owned by the applicant
  • Resume and industry experience

Harris County Bonding Agency

ABC Bail Bonds is the most trusted bonding agency in Houston, Texas. For more information on surety bonds, contact our office today.

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