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What are Surety Bonds and When are They Useful?

Wherever there is a deal, there is risk. When you buy a concert ticket, there’s a risk that you’ll be sick the day of the show and will have spent the money for nothing. When you buy a car, there’s a risk that you’re getting a lemon. In any deal, it’s always possible that, through bad luck or bad faith, you get the short end of the stick.

That’s what surety bonds are for. Surety bonds are essentially insurance policies for contracts. Here’s how they work.

What are surety bonds?

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Let’s say that you have a deal with a contractor. You’ll pay a set amount, and the contractor will build you a pool.

This makes you the obligee, the person who is obligated to pay.

The contractor is the principal, or the primary guy in charge of making sure that pool gets built!

If you’ve chosen a reliable pool contractor, then great, you’ll get your pool – money well spent. But what if you choose the wrong team, or if something goes wrong somehow and you end up with no pool? You’re out of luck – unless you have a surety bond.

A surety bond involves a third party in your transaction: the aptly named surety, who guarantees that the principal will deliver for the obligee. Now the obligee is protected: if the principal fails, the surety will step in and compensate the obligee as agreed. The service isn’t free, but it provides a measure of protection to the obligee.

When are surety bonds useful?

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Here are two general types of surety bonds, along with their common uses:

Contract bonding is the type used in our example above, in which a project (like a construction project) is protected.

Commercial bonding includes, among other things:

  • Court bonds and bail bonds.
  • Fidelity surety bonds protect the terms of a contract, such as employee conduct.
  • License and permit bonds, which are required by law in some areas, and mandate that the contractor follow laws and permit processes relevant to the project.
  • Public official surety bonds protect the terms of public service.

These days, getting surety bonds is easier than ever. You can shop for surety bonds online for quick and easy solutions.

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