Surety & Fidelity Bonds Explained
A surety bond is a three party written agreement whereby a SURETY guarantees a specific performance on behalf of a PRINCIPAL (customer/insured) to an OBLIGEE. The Obligee is usually a government entity such as a City, Town, or State.
Who Needs A Surety Bond?
Any business that has been required to carry one to do business with another entity.
Types of Surety Bonds:
There are hundreds of different surety bonds…each with a different obligation and bond form.
- License & Permit Bonds
- Public Official Bonds
- Probate and Other Court Bonds
- Miscellaneous Surety Bonds
- Contract Performance Bonds
Surety – License & Permit Bonds
License bonds guarantee the Principal will comply with applicable codes and regulations established by the Obligee. (The Obligee is usually a government entity such as a City, Town, or State.)
Permit bonds grant a Privilege
- Electrician’s license
- Plumber’s license
- General Contractor’s license
- Driveway permit
- Sign permit
- Sales tax
In Play Scenerio
Electrical contractors may be required to post a bond as part of their licensing requirements. The obligation of the bond may specify that the contractor will follow the electrical codes established in that city, town, or municipality. The requirements of the bond and ordinance must be understood before the bond is written. The agent may ask you to obtain a copy of the ordinance or law that specifies the requirements and a copy of the bond, if the Obligee has its own. Depending upon the type of obligation, supporting documentation such as signatures, financial statements, and other supplemental information may be required.
Surety – Public Official
A Public Official bond guarantees that elected or appointed officials will faithfully perform their duties. The bond amount as well as duties are usually specified by statute or ordinance.
- Tax Collectors
- Peace Officers
- Hunting & Fishing license agents
It should be noted that not all public entities require Public Officials to be bonded. Underwriting aspects of Public official bonds include understanding the duties required of the Official, the reputation (character) of the official, and experience of the official.
Surety – Probate & Other Court Bonds
A Probate bond guarantees an honest accounting and faithful performance of duties by fiduciaries/trustees. These bonds are required by courts or statutes as estates of deceased persons, incompetent persons, and minors are set up and administered. (For the estates)
A Bankruptcy or Equity bond might be required of an appointed fiduciary for the sale of real estate or for property in foreclosure, reorganization or other litigation. T his bond guarantees an honest accounting and performance of duties while managing and distributing the assets as directed by the court.
Common types include Receivers and Trustees.
Other Judicial bonds may be required by a court in cases where someone is seeking legal benefit or relief. These court bonds can be extremely hazardous. Specific supplemental information may be required.
- Attachment bonds
- Release of lien
Surety – Miscellaneous Bonds
Miscellaneous surety bonds include those that do not fit into any of the other surety categories. These are usually more hazardous obligations.
- Utility payment guarantees
- Lost Security/Lost Instruments (cashier’s check, stock certificates, and municipal bonds)
- Union Wage& Welfare
Miscellaneous surety bonds require more extensive underwriting because the guarantee to the obligee is monetary. In addition to the application, supporting information such as signatures, financial statements, and other supplemental forms are usually required.
Surety – Contract Performance Bonds
Simply stated, contract bonds guarantee the performance of a written contract according to its terms and conditions. Due to the nature of contract surety bonding, contract bonds require extensive underwriting. We recommend contacting your local State Farm agent at least one month before bidding on a contract. State Farm’s contract bond market focus is on the small artesian contractors market.
Types of Contract Bonds:
- Bid bond
- Performance bond
- Payment bond
A Bid bond guarantees that if a contractor is the low bidder on a project, he/she will enter into a contract and provide a Performance bond. A Performance bond guarantees the contract will be completed according to its terms and conditions. A Payment bond guarantees payment of laborors, subcontractors and material suppliers. Example: An electrical contractor may need contract bonds to guarantee the performance of construction contract or to guarantee the supply of goods and materials. Most public works projects required Bid, Performance, and Payment bonds from the contractor. These bonds will guarantee the contractor’s performance according to the terms of the contract with the project owner.
A Fidelity Bond will indemnify the insured for loss caused by a fraudulent or dishonest act of a person covered by the bond (generally an employee) with the intent to cause the insured a loss and benefit the employee or others the employee intended to benefit.
Who Needs A Fidelity Bond?
Business owners don’t typically believe employee dishonesty will happen in their business. However, employee fraud is more common than you think. Did you realize $3 Billion dollars of business profits are lost annually due to employee fraud?