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Suretyship is as old as biblical times, but there are many
misunderstandings and often confusion regarding obligations of the parties
involved. We trust that these answers to some very common questions will aid
you in understanding surety bonds.
What is a surety bond?
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As opposed to insurance, which is a two (2) party contract between an
insurance company and the insured, a surety bond is a three (3) party agreement
between a Principal, an Obligee, and a Surety. As a condition of being granted
certain licenses, permits, contracts, or prior to assuming duty as a public
official entrusted with funds, or a court appointed fiduciary, it is required
by many state and local governments (as well as the Federal government in many
cases) that the party assuming the responsibility (the Principal) provide the
requiring governmental body (or private party in some instances) (the Obligee)
with a guarantee that the Principal will perform all of the requirements of the
code and/or contract and/or the governing document or in lieu thereof the party
making the guarantee (the Surety) will either perform the obligation themselves
or pay a stipulated sum of money.
A surety bond is an extension of credit in the form of a guarantee
that provides protection to the party requiring the bond (the Obligee), but
provides no insurance to the Principal.
What kind of situation can be bonded?
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Virtually any obligation or agreement that is not insurable or in
violation of public policy can be bonded. The most commonly required types of
surety bonds utilized by the public on a daily basis are:
- Permit Bonds - guarantee that a licensed party will comply with
the code in a particular situation permitted by the local governing
body.
- Public Official Bonds - guarantee that a person in a position
of being an elected or appointed official will faithfully and honestly perform
the required duties of the job according to law.
- Contract Bonds - guarantee that the contractor principal will
perform the contract (building, road, sewer, materials supply, etc.) in
accordance with the plans and specifications of the specific project and pay
all required labor and material bills.
- Court Bonds - guarantee that the Principal will pay the court
or some other Obligee a sum of money including costs and interest if they
unsuccessfully appeal a money judgment; wrongfully attach or repleive property;
wrongfully file a restraining order, or any other obligation required of a
court.
- Probate Bonds - are filed in a Probate Court and are required
in most states to protect and preserve the assets of an estate of a deceased,
incompetent person, or minor. The court appointed guardian, executor,
administrator, trustee, or similar person must post the bond with the court to
guarantee their honesty and faithful compliance with the law as well as the
terms of a will, trust agreement, or court order which stipulates the conduct
required of them.
What would create a claim under a surety bond?
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The Principal's failure to fulfill his obligation would create a claim
against a Surety.
Who can make a
claim under a bond?
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Usually only the holder of the bond (the Obligee) can make claim under
the bond. The Principal can never make a claim.
What happens if a
surety has to pay a claim?
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A Principal is legally obligated to reimburse the Surety Company for
any loss and expense incurred by the Surety. The Principal's obligation to the
Surety can, therefore, be greater than the original obligation to the obligee.
The Surety has the same recourse against the Principal as any other creditor
would have in recovering their loss. This is the primary difference between a
surety bond and insurance.
How do I get a
bond?
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Please click here for a listing of our
branch offices and field representatives in your area.
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