What Is a Surety Bond?

A surety bond is a contract between three people or parties, who are commonly referred to as the principal, surety, and obligee. A surety bond gives a guarantee that a principal will fulfill a predetermined set of responsibilities to an obligee. In this case, the “surety” is a surety bond broker or an insurance company that offers the financial guarantee to the obligee on behalf of the principal. Keep reading for important information on surety bonds San Diego residents should understand before getting bonded.

How Surety Bonds Work

Surety bonds are more like transfers of risk. They’re structured to guard private and public interests from third parties. It’s a situation where the insurance only benefits a single party, is paid by a second party, and is financed by a third party. 

For instance, when a construction company is working on a commercial construction project, the company will be required to buy a contract surety bond. The surety bond protects the owner of the project against the construction company’s potential failure to complete the project as agreed. If the construction company fails to complete the project, the owner of the project has a right to file a claim against the surety bond. The surety bond company will be forced to pay the financial damages on behalf of the construction company. The construction company, on the other hand, will be required to pay the surety bond company after the damages have been paid to the project owner.

Contract Surety Bonds

Using the construction example above, this type of surety bond guarantees the construction company will abide by details specified in the construction contract. The obligee here is the owner of the project. The bond ensures the main contractor will carry out all the work as agreed.

Commercial Surety Bonds

These surety bonds are designed to protect the public interest and are often a government requirement for all agencies. For instance, the government might issue a directive that orders all new ventures or businesses in a certain sector (such as the mining industry) to acquire commercial surety bonds. In this case, the obligee is the public.

Fidelity Surety Bonds

Fidelity surety bonds are meant to protect companies against malpractice by employees who deal with cash and other valuable assets. These bonds are intended to protect against the loss of customers’ equipment, cash, and personal valuables. A fidelity surety bond is also designed to insulate a company from financial loss as a result of the fraudulent activity of employees.

Court Surety Bonds

This type of bond is often demanded by an attorney prior to a court proceeding to ensure protection from potential loss. The court surety bond guarantees the settlement of costs related to lawyer fees. Some court surety bonds are meant to guard estates against the malpractice of the estate administrators.

Surety bonds provide businesses and customers with peace of mind that their assets will be protected. If you need a surety bond to operate your business, reach out to the reliable professionals at Altra Insurance Services. In addition to surety bonds, we provide several types of insurance products, including homeowners, commercial, and auto insurance Chula Vista. Give us a call today at 619-474-6666 to learn more about our high-quality services.