What Is a Surety Bond and How Much Does It Cost?

A surety bond guarantees payment to the buyer’s client in case they fail to meet their obligations and the client suffers a loss.

An Introduction to Surety Bonds

A surety bond is an agreement between three parties: the Principal, the Surety, and the Obligee. The Principal is the party that has purchased the bond, the Surety is the party that guarantees payment, and the Obligee is the Principal’s client.

Surety bonds usually fall under one of these categories:
• Fidelity surety bonds
• Commercial or miscellaneous surety bonds
• Contract bonds
• Court bonds

Many companies have a policy of awarding contracts only to contractors who have a surety bond. Some government agencies want contractors to use a bond to guarantee that they will carry out the work in strict compliance with applicable laws.

Surety bonds are also bought to satisfy licensing requirements set out by state, local, and federal regulatory bodies or to satisfy requirements for private contracts.

How Does a Surety Bond Work?

If the Principal fails to perform the work in accordance to the terms of the contract or fails to fulfill a duty, the Obligee files a claim with the Surety. On receiving the claim, the Surety launches an investigation.

If the claims made by the Obligee are found to be true, the Surety compensates the Obligee. Afterwards, the Principal must pay the Surety back the full settlement amount as well as any other costs / expenses that may have been incurred.

Benefits

Surety bonds help build credibility and trust and instill customer confidence. When awarding contracts, companies usually prefer bonded contractors over unbonded contractors. Many businesses have a policy of awarding contracts only to bonded contractors.

When a business hires a bonded contractor, the business owners have peace of mind knowing that they won’t suffer any losses even if the contractor fails to deliver on their promise.

Cost

The premium for a surety bond is often a certain percentage of the coverage amount. Some factors that determine the premium are

➢ The credit and financial health of the Principal
➢ The type of bond required for the perceived amount of risk
➢ The bond amount

Usually, the smaller the bond amount, the easier the underwriting requirements. Bonds that provide more coverage than usual, typically have additional requirements. Usually, insurance companies perform an exhaustive analysis of the company’s financial records to check its financial health before offering a high value bond.

With so many options, it’s easy to get overwhelmed when selecting a bond for their particular need or business. If you are confused between multiple options, H.M. Vreeland can help. We have over 100 years of experience helping individuals, attorneys, legal professionals and other businesses in Los Angeles and California safeguard both their and their clients’ interests. To learn more, call (415) 566-3401.