Surety Bonds

Surety Bonds with Guardian

A Surety Bond is a three-party agreement whereby the surety guarantees to the obligee (the project owner) that the principal (the contractor) is capable of performing the contract in accordance with the contract documents. Performance of the contract, determines the rights and obligations of the surety and the obligee.

Types of Bonds

Bid Bonds Bid Bonds are usually the first step in a bonded contract process. Each bidder for a contract must guarantee the price bid by posting a certified check or indemnity bond, which is forfeited if the contractor fails to enter into the contract awarded. Usually the amount forfeited is the difference between his bid and the next lowest bid. The charges for Bid Bonds are nominal so as to encourage contractors to use Bid Bonds rather than certified checks. Bid Bonds guarantee that the contractor will enter into a contract at the amount bid. When he does this, the Bid Bond is released. Performance Bonds The Performance Contract Bond guarantees performance of the terms of a contract. It may be for the construction of a building or road or perhaps for a supply contract. It could be for a transportation contract or almost any kind of contract where one party might experience harm if the other party fails to perform. The Performance Bond is largely the result of governmental and other public bodies which are required by law to award contracts for public work to the lowest responsible bidder. The requirement of a Performance Bond and the screening process which the surety must do, eliminates unqualified contractors before the bidding process begins. Performance Bonds are also frequently required in the private sector, including residential construction. In most cases, the bond guarantees completion of the work and payment of all labor and material costs.
License and Permit Bonds “put teeth” into the laws passed for public protection. For example, sewer builders must conform to city sanitary regulations. They must give a bond to guarantee compliance with city regulations. If they do not comply, the surety pays damages or ensures compliance. The surety’s great care in selecting its risk helps insure that only capable sewer builders will be licensed. License and Permit Bonds are divided into five classes:

  • Those designed to protect the health and safety of the public, e.g., a sewer builder.
  • Bonds required of an individual who has been granted some public privileges which may become a hazard to the general public, e.g., hanging a sign over the street.
  • Those bonds which protect the public against loss of money or goods entrusted to the licensee, e.g., real estate broker, public warehouseman, etc.
  • Those required of businesses highly susceptible to unscrupulous practices, e.g., small loan companies, motor vehicle dealers.
  • Bonds which guarantee payment of taxes collected, e.g., gasoline tax bonds, sales tax bonds.

This latter category represents one of the most important types of surety bonds. These bonds guarantee that the principal will pay over to the state all tax monies received. In the event the principal fails or is unable to pay the tax, the surety company pays for any losses. Without corporate surety, a state program may not be able to collect its revenues. In all these cases, bonds endeavor to protect the public against irresponsible licensees.

There is always the possibility that an employee will steal. Statistics show a shocking increase in employee theft. They also identify theft as the leading cause of small-business failure. The only protections against this kind of loss are good internal control, regular outside audits and a Fidelity Bond. Fidelity Bonds are often referred to as “honesty insurance.” They cover loss due to any dishonest act of a bonded employee. The employee may steal alone or with others. The loss may be money, merchandise or any other property, real or personal. The Fidelity Bond is available in a group (blanket) or individual (schedule) form.
A fiduciary is a person appointed by the court to handle the affairs of persons who are not able to do so themselves. The fiduciary is often called a Guardian or Conservator if he handles the affairs of a minor or an incapacitated person. An Administrator is a fiduciary who handles the affairs of someone who has died; he or she is known as an Executor if specifically named in the will. Fiduciaries are often required by statute, courts, or wills to be bonded. Statutes prescribe how fiduciaries should handle others’ affairs. However, the surety company often assists in keeping the fiduciary within the law. Assistance of a surety is available to the principals or their attorneys. Supervision by the surety helps prevent problems and secure the assets entrusted to the fiduciary. Through careful underwriting practices, a surety also attempts to minimize losses. In addition to the loss prevention services performed by a surety, the bond creates protection. If there should be a loss, the surety pays heirs, wards, creditors, and beneficiaries.

Court Bonds are required in many court proceedings to ensure that one is protected from possible loss as a result of the outcome of the proceeding.

Types Offered 

  • Judicial (Plaintiffs, Replevin, Attachment, Costs on Appeal, and Indemnity to Sheriff)
  • Probate (Administrators, Executors)

Judicial bonds are written for parties to lawsuits or other court actions (plaintiffs and defendants). In anticipation of a favorable judgment, plaintiffs often want to take possession of the property, cash or merchandise in question without waiting for the trial. Those who are financially reliable can often achieve that goal by posting plaintiffs court bond.

The plaintiffs bond is usually required to protect the defendant should the court decide that he, and not the plaintiff, is entitled to the property or the judgment. Types of plaintiff bonds include Indemnity to Sheriff Bonds which protect the sheriff against suit when dispossessing a person of property or goods and Cost Bonds which guarantee payment of trial costs. Other types of plaintiffs bonds include Cost on Appeal, Injunction, Attachment, Objecting Creditors, Replevin and Petitioning-Creditors-in-Bankruptcy Bonds.

The second type of Judicial Bond is the defendant’s bond. A defendant in a court case might want a bond to counteract the effect of the bond that the plaintiff has furnished. Some common types of defendant’s bonds are Release of Attachment and Counter Replevin. Generally speaking, these bonds have proven to be more hazardous than plaintiffs bonds. Accordingly they can only rarely be written without the posting of adequate collateral to protect the surety from loss. In criminal actions, bail bonds are the most common type of defendant’s bonds. They guarantee that the defendant will show up for trial.

Public Official Bonds guarantee taxpayers that the official will do what the law requires. A public officials expected to “faithfully perform” the duties of the office. For this reason, bonding public officials is highly important. It isn’t enough to simply buy honesty insurance. “Faithful performance” is not synonymous with “honesty.” It may include honesty along with many other important factors.

For instance, a county treasurer may have lost funds through a failure of a bank he thought was sound. If the treasurer did not obtain proper depository security, he could be held liable for restitution. The county treasurer could easily prove that he did not act “dishonestly.” However, he would have difficulty proving that he “faithfully performed” his duty. Public Employee Bonds are also available for bonding the subordinates of the public official (those people who are not required by statute to be bonded). Those subordinates need to be bonded for dishonesty only.

Public Official Bonds maybe written for individuals or, where the law allows, on a blanket bond form.

There are almost as many categories of surety bonding as there are categories of agreements, contracts and situations where people may fail to perform as promised.
Some of these are:

  • Bill of Lading Bonds, Adoption Bonds, Financial Responsibility Bonds and Travel Agency Bonds.
  • Lost Securities Bonds.
  • United States Excise Bonds. (Includes Brewer’s Bonds, Distiller’s Bonds, Industrial, Alcohol Bonds, Wine Maker’s Bonds, and Tobacco Manufacturer’s Bonds.)
  • Custom Bonds. (Includes Importer/Exporter Bonds, Carrier Bonds, and Warehouse Bonds.)
    There are many others too numerous to mention. In these special situations, the experience of a corporate surety can be very helpful.

A liquor bond is required by the government to participate in the sale, manufacturing, or warehousing of liquor.

Street Obstruction Bonds

When building or construction projects involve the closing or obstruction of streets, alleys, or sidewalks, the construction company or contractor has to apply for an application with city officials that shows the amount of space the contractor will use. The contractor also has to show a street obstruction bond in order to obtain a building permit that allows the street or sidewalk obstruction during the period of construction.

This street obstruction bond covers compliance with ordinances and indemnifies the city or municipality against any claims arising by reason of a permit to obstruct streets.

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