Surety bonds are required in practically every profession in the U.S. There are many different types of surety bonds, but all are essentially an agreement between three parties:
- Principal: the person required to post a bond;
- Obligee: the person or entity requiring the principal to be bonded; and
- Surety: the institution providing a financial guarantee to the obligee on behalf of the principal.
If the principal fails to meet his or her obligations to the obligee – which could mean anything from complying with certain laws and regulations pertaining to a business license to meeting the terms of a specific contract – the surety may have to pay a claim to the obligee. A surety bond is a risk transfer mechanism and a legally binding contract.
Benefits of Surety Bonds
Surety bonds are purchased by a principal because they are required, either by a government entity or as a condition of a contract. However, these bonds provide benefits for the principal as well. They are a cost-effective alternative to posting cash directly with a trustee or the obligee or providing an irrevocable Letter of Credit in lieu of a surety bond.
As the principal, you pay a small percentage of the bond amount to the bonding company (surety) to provide a guarantee to the obligee, rather than parting with your liquid cash. Basically, when you purchase a surety bond, it is a form of credit extended to you.
The cost of a surety bond is based on three factors:
- Type of surety bond
- Amount of the bond
- The risk level of the applicant
If you need a surety bond for professional purposes, contact our agent at Builders & Contractors Insurance Services in Los Angeles, California, for a quote.