What Is a Surety Bond? | Debunking the Five Common Myths
In the construction industry, a surety bond plays a huge role in ensuring that quality results are produced.
But what is it exactly?
A surety bond is a written three-party agreement that guarantees payment, compliance, and performance of a service or act. It involves three parties: the principal, surety, and obligee.
There are several common misconceptions or myths about the surety bonds that can be misleading, resulting in people shying away from such contracts. Since knowledge is power, this blog answers the question “What is a surety bond?” and debunks five common surety bond myths.
- Surety Bonds Are Similar to Insurance Contracts
- Surety Bonds Protect the Principal in the Contract
- Surety Bonds Are Like Premiums
- Surety Bonds Requires Full Payment at Once
- The Cost of Surety Bonds Is the Same Across Different Industries
- Get Reliable Surety Bonds to Boost Your Business
What Is A Surety Bond?
As mentioned earlier, a surety bond generally involves three parties: the principal, surety, and obligee.
The principal is the party that purchases the bond and promises to perform a service or an act. A surety is the insurance or company—such as Contractors Insurance—that ensures the principal performs the guaranteed action and the obligee benefits from the surety bond. In a surety bond contract, the obligee—typically the local, federal, or state government or organization in charge of the project—is protected from illegal, mediocre, or substandard work or services from the principal.
Debunking Five Common Surety Bond Myths
1. Surety Bonds Are Similar to Insurance Contracts
A surety bond is not the same commodity as insurance.
Here’s how they are different:
First of all, insurance is a contract between the insurer and the insurance company, while a surety bond is between the principal, surety, and the obligee. Secondly, insurance protects home and business owners, professionals, and individuals from financial losses for covered causes. A surety bond safeguards the obligee from low-grade or poor-quality work or services on a contracted project.
2. Surety Bonds Protect the Principal in the Contract
Another myth that needs debunking is that a surety bond safeguards the interest of the person that purchases the bond. When the principal, insurance or surety company, and the obligee enter into a contract, it ensures the latter get exceptional services or perfect completion of a project.
For instance, a contractor license bond protects the local or state government that issues the bond. The bonds prevent financial distress through insolvency that is common with substandard uncompleted projects.
3. Surety Bonds Are Like Premiums
Contrary to insurance premiums that are payable monthly, surety bonds are a one-time payment. You only pay for a limited time, usually one to three years, if you are financing the bond.
4. Surety Bonds Require Full Payment at Once
An additional surety bond myth is that they are expensive due to the fact that a contractor must pay the entire bond at once when purchasing. This is a misconception because individuals buying the bonds can settle a small percentage of the bond first. Then, they can pay the remaining amount in installments. It is worth noting that the installments to offset the bond balance are not considered “premiums.”
5. The Cost of Surety Bonds Is the Same Across Different Industries
Surety bonds exist in many different industries and fields. This diversity reflects in the actual costs of surety bonds, which varies depending on the industry. For example, a contractor buying a contractor license bond would pay different fees compared to a car dealer purchasing a Motor Vehicle Dealer Bond.
Get Reliable Surety Bonds to Boost Your Business
In this article, we answered the question, “what is a surety bond?” We also talked about what a surety bond isn’t by debunking common myths. If you’re still unsure whether your business needs a surety bond or not, learn more from our FREE resources:
Contractors Insurance is a trusted provider of customized insurance solutions and reliable surety bonds. With the right mix of these services, we can help bring your business to a more secure future. If you have more questions about surety bonds, feel free to contact our friendly team today!BACK TO ALL ARTICLES
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