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A surety bond is a binding contract between three different parties, which include the principal (the one who needs the bond), the surety (the company who writes the bond), and the obligee (the department requiring the bond).
The surety bond provides a guarantee to the obligee that the principal will conduct themselves per the terms outlined in the surety bond.
Surety bonds are legally binding contracts that ensure obligations will be met between three parties:
- The principal: whoever needs the bond
- The obligee: the one requiring the bond
- The surety: the insurance company guaranteeing the principal can fulfill the obligation
Surety bonds work as a form of insurance. If the bond’s requirements are not met, such as not performing contracted work or failing to pay suppliers or vendors, a claim may be filed against the bond. Think of a surety bond as a form of credit to the principal. Whether claims or made by the public or the obligee, they must be repaid by the principal to the surety.
Although the surety backs the bond, you are required to sign an indemnity agreement. This is also known as a general agreement of indemnity, and it includes your business and all owners.
Indemnity agreements pledge your corporate and personal assets to reimburse the surety for any claim(s) and legal costs that may arise.
Do I need a Surety Bond?
You only need a surety bond if you’re being required to obtain one, which you will be notified of depending on the circumstance. There are hundreds of surety bond requirements across the country for varying reasons and occupations. Some of the more common bond types are required to get a business license, such as auto dealer bonds, contractor license bonds, mortgage broker bond, and freight broker bonds.
What does a Surety Bond cover?
When you are required to get a surety bond, you are expected to abide by the terms of the bond. If you fail to do so, a bond claim is made. This can be a costly endeavor for a few reasons. When it comes to surety bond claims, you are expected to pay every expense of the claim, including legal costs.
The surety providing your bond is saying you are in a strong enough financial position to cover any claims that may arise. If the surety is wrong and payment cannot be collected from you directly or through the courts, they are ultimately responsible for the costs. For this reason, bonds are underwritten based on the potential of a principal causing a claim, as well as the ability of the principal to repay a claim in the future.
I have E&O coverage, do I need a Surety Bond too?
Although a professional business may need both surety bonds and professional liability insurance, there are significant differences between the two. Our experienced agency can help you secure both forms of protection.
- Contract: A professional liability insurance policy is a contract between the insurance company and the insured, wherein the insurer promises to compensate the insured for covered losses. A surety bond is a contract among three or more parties to guarantee that the principal purchasing the bond will complete its obligations to a third party.
- Protection: While E&O insurance is designed to protect the insured from loss, surety bonds are designed to protect third parties.
- Premiums: Professional liability insurance premiums are paid to cover potential losses the insured may incur. Surety bond premiums are paid to guarantee the principal fulfills its obligations.
- Claims: A claim on an E&O policy is paid by the insurance company to make the insured whole after a loss. With a surety bond, the principal is responsible for paying any valid claims.