Unlike business insurance, surety bonds are contracts between three parties. A party that is harmed can file a claim against the bond to recover compensation for financial loss.
The type of bond you need will depend on the type of work you do. Here are some of the most common types: .
License and Permit Bonds
License and Permit Bonds are a general category of commercial surety bonds required by many state or local governments for certain businesses to obtain a business license. They guarantee that the bonded business will operate according to the laws of the jurisdiction in which it operates. They can also protect consumers from harm resulting from any business activities. If a consumer is harmed by a licensed business, they can file a claim on the bond with the surety company to receive compensation.
Some common examples of these types of bonds include Bonds for California contractors, mortgage broker bonds, auto dealer bonds, freight broker bonds, and telemarketing agency bonds. However, there are many more types of these bonds depending on your specific industry and the type of licensing you need.
As with all surety bonds, they are a three-party agreement that legally binds together the principal (the bond purchaser), the obligee (business or government entity requiring the bond) and the surety company that sells the bond. The principal is responsible for complying with the law and if they do not, the obligee can make a claim on the bond to receive compensation. The principal must then reimburse the surety company for the claim payment, which can be costly for the business if claims are frequent. In addition, proven claims can impact your ability to obtain future surety bonds.
Court Bonds
While they may go unnoticed by many, surety bonds play a large role in the lives of businesses across America. The types of bonds required can vary by industry, state and even locality. Some examples of industries requiring bonding are auto dealers, mortgage brokers, contractors, freight brokers and telemarketing agencies. Each bond type is unique and the cost of a bond varies depending on your business history, experience, licenses, credit and other factors.
A surety bond is a legally binding contract between three parties: the principal, the obligee and the surety company. The principal purchases the bond to guarantee that they will fulfill a contractual task set by an obligee. This includes a variety of duties like paying taxes, meeting employment standards, adhering to environmental regulations and more.
A court bond guarantees that a plaintiff will comply with a court’s ruling in a civil lawsuit. The best known kind of court bond is the bail bond, which ensures that a defendant will appear in court for hearings. Other kinds of court bonds include attachment and appeals bonds. Fiduciary bonds like trustee and probate bonds guarantee that a fiduciary will act in compliance with legal and ethical requirements set by the courts when managing financial and real estate assets.
Fidelity Bonds
Fidelity bonds, also known as honesty or dishonesty bonds, act like insurance policies to protect companies from theft and other forms of fraudulent activity that cause financial loss. The type of fidelity bond you need depends on the industry you work in. For example, a business service bond is purchased to protect clients of a business that provides cleaning services. A brokerage or financial advisory firm would require a fidelity bond to safeguard against employee embezzlement. Other types of fidelity bonds include money transmitter, lost instrument, subdivision and talent agency bonds.
In the case of a fidelity bond, the obligee is typically the government, such as the Department of Labor for pension plan trustees. In the case of an ERISA bond, the obligee is the employer that manages employee benefits such as 401(k) plans and the employees who participate in those plans. When a claim is made against a fidelity bond, the bond company pays the amount of the claim and then seeks reimbursement from the principal.
A defendant bond, which protects the defendant from a plaintiff’s attempt to collect the satisfaction of a judgment against them, is another type of surety bond. Defendant bonds are required of many plaintiffs before their lawsuits proceed through the court system. A plaintiff bond, on the other hand, protects the plaintiff against financial harm should they lose a lawsuit.
ERISA Bonds
The ERISA Bond is a specific type of fidelity bond, which is required under the Employee Retirement Income Security Act (ERISA) for individuals or entities with fiduciary duties over employees’ retirement plans. These bonds protect against malpractice, theft, and dishonesty by plan administrators in their management of the funds. If a person or business suffers financial harm from this conduct, they can file a claim against the bond to receive compensation.
The cost and terms of a surety bond vary widely depending on state requirements, the type of bond, industry, size of the bond amount, credit history, and more. Gallagher works as a broker, connecting principals with the best-fitting, lowest-priced surety products available in the market.
Contract bonds are a common type of commercial surety bond, guaranteeing that contractors complete projects in accordance with the legal terms established by the contract. They also typically ensure that a contractor will reimburse the obligee for any property losses suffered as a result of contract defaults.