An Introduction to Surety Bonds


Did you ever buy or sell a used car? If so, you might have come across people who advised you to acquire something called a bonded title if you’re the seller (or get a car with one if you’re the buyer). If this is the first time you’ve heard of this term, we’ll give you the shortest rundown possible. Sometimes, the owner of the vehicle doesn’t have a valid title that might help them transfer ownership to a different person. In order to protect the buyer legally, a bonded title is issued, which guarantees the procurement of a clear title at a later date.

This document is one of many variants of something called a surety bond. And it won’t surprise you that you can get such bonds for a wide variety of reasons. But what exactly are surety bonds and who might acquire them? In this article, we go over that exact question, giving you the basic run-down of everything related to surety bonds.

Surety Bonds 101

In the simplest terms possible, a surety bond is a binding agreement between three different parties. One party provides a financial guarantee to another that a third party will fulfill all of the necessary obligations. Furthermore, the bond assures the parties that they will meet every single legal requirement. The three parties are called the surety, the obligee, and the principal.

The Participants of a Surety Bond In Depth

Let’s take a closer look at all three parties, starting with the surety. Basically, sureties are the ones who issue the bonds and they are the ones who guarantee financial coverage. Usually, this party is an insurance company that determines the risks related to the agreement and provides standard insurance premiums.

Next, we have the party that acquires the bond, i.e. the obligee. Generally speaking, an obligee can be anyone, from a construction company or a business to entire cities, municipalities, or states. In a sense, obligees are clients of sureties.

Finally, there are the principals. Principals are parties that present the bonds. Sometimes, it will be in the form of a project, or a stipulation to do business in some particular city or state. Principals are the ones who have to follow all of the legal details of a surety bond to the letter if they are to present the bond to the obligees.

Different Types of Surety Bonds

Generally speaking, there are thousands of different kinds of individual surety bonds. In fact, there are so many that even classifying them is somewhat difficult. Some people will group them into three types, others into five, and so on. For this article, we decided to go with the most common classification. Therefore, most surety bonds will fall under one of these four types:

  • Contract surety bonds
  • Commercial surety bonds
  • Court surety bonds
  • Fidelity surety bonds

Contract Surety Bonds

As their name suggests, these bonds exist to make sure that each contract goes through according to the set legal terms. With these bonds, the obligee will receive their due compensation in case the contract defaults or if some of the requirements are not met.

Bid Bonds

This type of contract bond becomes valid if the obligee accepts the contractor’s bid for a project. If the contractor decides to pull out from the project, the project owner receives compensation equal to the difference between the contractor’s original bid and the next lowest bid.

Performance Bonds

This type of bond ensures that the obligee receives compensation if the contractor doesn’t complete the task or the project properly. In other words, if the task is not finished on time or to the specifications of the agreement, the surety company will see to it that the work is done and that the obligee is compensated.

Labor and Materials Bonds

Also known as payment bonds, these documents make sure that contractors compensate everyone involved in the project fairly. That includes paying equipment suppliers, subcontractors, and laborers in full for their services.

Commercial Surety Bonds

A commercial surety bond is used to regulate various markets and to prevent professionals from committing any type of fraud or harmful business practice.

License and Permit Bonds

Governments tend to issue these bonds. Their purpose is to make sure that particular permit or license conditions will be carried out.

Lost Document Bonds

As the name suggests, these bonds will help in covering any cost related to a lost business document.

Administration, Property, and Guardianship Bonds

Most of the time, these particular bonds handle everything related to trust and estate matters.

Customs and Excise Bonds

These bonds cover matters pertaining to the export and import of goods.

Court Surety Bonds

If the obligee is pursuing legal action, they will require a court surety bond in order to reduce any risk of financial loss. Such bonds can also serve to help fulfill a specific court-appointed task.

Judicial Bonds

Judicial bonds exist to limit any potential losses that could come from a judicial ruling. Some subtypes of judicial bonds include bail bonds, appeal bonds, and plaintiff’s-attachment bonds.

Fiduciary/Probate Bonds

A typical fiduciary or probate bond is put in place to ensure that anyone who manages the obligee’s financial assets does so ethically and responsibly. Subtypes include executor bonds, custodian bonds, and guardianship bonds.

Fidelity Surety Bonds

Fidelity bonds exist in order to protect the business owner or the hiring party from any type of mismanagement by employees. Such bonds ensure that employees don’t engage in any damage, theft, or other unsavory activity. Unlike most other bonds, sureties usually draft them to be long-term. If the employee is a member of a union, that union will probably have to handle any costs related to the damage or mismanagement, as stipulated by the bond.

Surety Bonds: Bottom Line

As you can see, there are many different types of surety bonds, and we have barely scratched the surface. And yes, to someone new to sureties, all those types and subtypes will seem complicated and a bit overwhelming. However, acquiring a bond is important, as it gives all parties legal coverage in case something goes wrong. So, whether you’re selling a car, starting a new business project, or undergoing a legal procedure, you might want to look into acquiring a surety bond today.

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Hi, I'm James George, the founder of Mind My Business NYC and author of this blog. I am an entrepreneur and internet marketer. My wish is that this website helps you to grow your business and achieve your goals.


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