Surety Bonds: Shield against Defaults

2007-03-08 10:33:40

( Financial )



AN ISOSCELES TRIANGLE

Surety bonds in simple terms are contracts willingly entered into by three parties, each bound to fulfill a legal duty to the other parties involved. Surety bonding basically is insurance that an obligation will be accomplished and completed.

The three parties involved in surety bonds are the principal – the person or entity that is asking for money, services, or products; the obligee – the entity providing the money, services, or products; and the surety - the person or entity duty-bound to pay the obligee if the principle defaults on his payments.

While it may sound complicated, surety bonds have a fairly simple set-up. Surety bond companies will most likely be an insurance company. If you are the surety, a principal will approach you telling you what they need from a certain person or organization. You as the surety, will then approach the obligee with promise of surety bonding. In most cases, an obligee will agree because of the bond surety that protects them from non-payment either way. If for some reason the principal cannot pay, the surety, by virtue of the contract is then compelled to pay the obligee.

The surety bond companies ask for fees in return for the services that they provide. These fees are usually in the form of annual premiums that must be paid as long as the surety bonds are active.

AN ASSURED SOCIETY

Surety bonds exist in our society in so many forms. When you are borrowing money and you present a guarantor to the lending company and the lender obliges, then you have entered into a surety bond with the guarantor as your surety.

Bail bond is also a type of surety bonding. When a suspect posts bail, he is expected to show up for court during the course of the trial. If the suspect does not show up, the bail bondsman pays the court the bail amount.

Surety bonds are mostly used in the construction business due to the risky nature of this particular industry.


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