Answers to Your Top Three Questions About Surety Bonds

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surety-bonds-101-7671470 If you work in the finance industry, you might have been told that you have to purchase a surety bond before you can be licensed. Don’t worry; you’re not alone in wondering What is a surety bond?” Most business professionals have never heard of these insurance products until they’ve been told they have to purchase one.

So, what is a surety bond, anyway?

To put it simply, surety bonds are legally binding contractual agreements that guarantee tasks will be completed appropriately. Although surety bonds are similar to traditional insurance policies, they differ in a few key ways. Insurance underwriters expect to provide financial reimbursement as a result of a policyholder’s performance (or lack thereof). Surety underwriters, however, do not expect to pay out claims, so the underwriting process is quite a bit different.

Whereas insurance policies traditionally involve two entities — an underwriter and a policyholder — surety bonds involve three entities.

  • The obligee is the government agency or other entity that requires a business or individual to purchase a bond.
  • The principal is the business or working professional that must be bonded to show intent of fulfilling a task according to law.
  • The surety is the underwriter that backs the principal’s promise with a financial guarantee.

If a bonded principal fails to fulfill the bond’s terms, then the obligee can make a claim on the bond to gain financial reparation. If the claim is valid, the surety will pay reparation up the the bond’s full amount. Because underwriters generally do not assume loss, they usually include an indemnification clause in the bond’s language. This indemnification clause explains that the principal is expected to repay the surety for any and all claims.

How do I benefit from a surety bond?

Now that you know you’re required to purchase an insurance product that doesn’t directly benefit you or your business, you might be wondering “What’s in it for me?” Even though surety bond contracts are generally used to protect government agencies and consumers, the bonding process does provide principals with some indirect benefits.

1. Surety bonds uphold the integrity of your industry.

Government agencies typically require those working in finance, such as mortgage professionals, to purchase surety bonds for two key reasons. The first reason is that the contractual language of a surety bond provides a financial guarantee that bonded professionals will follow industry regulations. The second reason is that this financial guarantee protects consumers and government agencies that might be harmed if a bonded principal should break the bond’s terms. As such, surety bonds first reinforce industry regulations and then protect those who might be harmed by professionals who choose not to follow them.

2. Surety bonds reassure clients that you run a trustworthy enterprise.

You’ve probably seen business owners advertise their companies as being legally licensed and bonded. They do so because they know that bonds can be used as marketing tools that reassure clients of an enterprise’s integrity. By issuing a surety bond, an underwriter not only shows faith in the bonded entity’s ability to perform in a professional capacity but also provides a financial guarantee of the professional’s ability to do so. You can see why consumers appreciate working with bonded businesses.

3. Surety bonds reduce competition by keeping unqualified business owners out of your industry.

The surety bond application process is quite stringent. This means some individuals cannot qualify for the bonds they need. When applicants do not have sufficient financial credentials to warrant the acquisition of a surety bond as required by law, they will not be permitted to work in the industry. Thus, some business owners are eliminated from the industry, which limits competition for you while also protecting consumers from working with those who might not be qualified to work in the industry.

How do I get a surety bond?

You should know the exact surety bond form you need along with the bonding amount before you contact a surety provider. Having this information from the get-go allows the surety provider to issue your bond quickly and accurately. To get this information, contact the government agency or other entity that’s requiring you to get a bond. If you’re told you don’t have to meet a surety bond requirement, you won’t need to purchase a bond. Developments within the surety market within the past five years have completely revolutionized the surety bond process. You can now get a surety bond by searching for a surety bond company online. When you apply for a surety bond, you’ll have to answer basic questions about your professional work experience and personal financial history. This allows underwriters to determine the risk associated with issuing a bond. Your surety provider will also use information from your application to calculate your surety bond premium. The surety bond process might seem confusing at first, but professionals who have a basic understanding of bonding will be better prepared for the application process.

Danielle Rodabaugh is a principal at SuretyBonds.com, a nationwide surety bond broker. Through its educational outreach program, SuretyBonds.com helps business professionals in an array of industries understand how surety bonds work and why government agencies require them.