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Understanding Surety Bonds – A Comprehensive Guide

Most of us are used to processing policies for our clients with a familiar process in the insurance industry.

Surety bonds, however, are a different product that requires a unique approach. Understanding the basics of this complex and essential product will help you help your customers. Here are a few things to remember when working with these bonds.

The principal purchases the bond and signs an indemnity agreement that pledges their personal and business assets to pay a claim in the event of a default. They must also fulfill all obligations in their bond contract with the obligee, typically a government agency, private developer, or commercial and professional party. Auto dealers, licensed contractors, freight brokers, and construction companies are all common examples of professionals required to obtain a license or permit bond. Other surety bonds are a requirement for contract work on public projects.

So, what is a surety bond? A surety bond is a three-party agreement that guarantees the fulfillment of an obligation outlined in a contract or law. The parties involved are the principal, the surety, and the obligee.

There are countless types of surety bonds. Some are required for a specific professional license, while others guarantee payment of taxes or other financial obligations. Each one is unique and serves a different purpose.

What are the requirements for obtaining a surety bond?

Obtaining a surety bond depends on the type and amount of the bond and your personal credit history. Most license bonds can be approved within minutes of receiving the completed application. In contrast, contractor or court bonds may require an in-depth process that includes a detailed application, business and personal financials, and a thorough background check.

When a person or business must purchase a surety bond, they must contact a licensed professional insurance agent to sell and produce surety bonds, also known as a surety producer. Surety producers have a network of connections with various underwriters that can help ensure the best possible rates on your surety bond. In addition, some producers can offer alternative methods to help strengthen your application for a surety bond, such as providing collateral or co-signers with superior credit histories to the applicants. These options can often lead to an approval or a lower bond premium.

How do I qualify for a surety bond?

A surety bond guarantees that you’ll fulfill an obligation or contractual agreement. Your specific bond requirements depend on your location and industry. For example, a government agency may require a construction company to purchase bid, performance, and payment bonds before awarding them a contract. The bonded contractor (the principal) enlists a third party, known as the surety, to guarantee that the governing laws will complete the work.

Many people and businesses need to be made aware that they must post a surety bond until they receive a notification that they must do so. Once you know that you need to get bonded, you should start by researching your state’s specific requirements and determining the coverage amount required.

Next, you should find a licensed surety bond agency to complete an application with. You’ll need to provide information about your business, a financial statement, and a credit check. If underwriters find you a high risk, your bond premium will likely be higher.

How do I claim on a surety bond?

A surety bond works differently than insurance. While insurance protects you, the policyholder (or “insured”), surety bonds are designed to protect a 3rd party that was harmed by your actions. If a claim is upheld, the bond company will reimburse the harmed party up to the coverage amount on the bond.

The bonded principal is responsible for cooperating with the surety bond company during the entire claim process. The bonded principal is also responsible for paying back any money the surety bond company pays out on a claim, including any costs associated with the investigation.

The most important step when a claim is made on your bond is promptly responding. Failure to do so can result in a loss of your bond and a possible legal or financial consequence from the harmed obligee. If you can prove the claim is invalid, you can request that the surety bond company decline the claim in writing.

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