Depending on what industry your business is in, you may have heard about surety bonds.
Some people mistakenly confuse bonds with insurance. In reality, they are much different.
So, what are surety bonds? In this business article, we will teach you everything you need to know about surety bonds and the primary industries requiring them.
It’s The Law
You’re probably aware that complying with industry-specific regulations established for your particular line of work is a legal requirement no matter what your business provides.
You need to be aware of everything required to conduct your business according to the law, from tax laws to safety rules. In many industries, one such requirement is a surety bond.
What Is A Surety Bond?
A surety bond is a three-party contract that provides a legally binding financial guarantee. The three parties involved are the following:
The principal is the entity that obtains the bond to guarantee that it will fulfill its obligation to another party.
The obligee is the party that requires the principal to get a surety bond to protect themselves against potential financial loss.
A surety company is a neutral third party that neither provides nor needs the bond. The role of a surety company is to provide the financial guarantee that the obligee will adhere to, perform or satisfy their contract requirements.
With this in mind, it’s easy to see how valuable surety bonds are in how they help customers, suppliers, and state agencies protect themselves against the risk of fraud and malpractice.
The obligee (usually a government agency) often requires a surety bond as a condition for issuing a license to the principal.
In other cases, the surety bond’s function is to ensure that the principal will honor their contract.
Those terms might have to do with the deadline for completing a job, the standard of quality to which it must be completed, or obeying the laws and ethical guidelines of the industry.
The surety bond company agrees to compensate the harmed party if the principal breaks the terms from the bond. Each surety bond includes a penalty sum — the maximum amount the surety company will pay the obligee.
However, that does not mean the principal does not need to pay anything. The principal is still obligated to reimburse the surety company for the whole amount.
Who Needs A Surety Bond?
The primary industries that use surety bonds include:
- Vehicle Dealers
Before they can get their motor vehicle dealer license, auto dealers usually have to obtain a surety bond that guarantees their dealership will comply with the industry regulations.
Here are some of the most common types of surety bonds regulating the auto dealers’ business.
Motor Vehicle Dealer Bond
Also known as auto bonds, they guarantee that an auto dealership will follow the law. Auto bonds protect both the customers and the creditors from fraud or unethical conduct by the dealer.
Registration Service Bond
This type of bond guarantees that the businesses licensed to provide some DMV services do so legally and ethically.
In many states, private businesses have contracts with the DMV, which allows them to perform administrative work such as vehicle registration.
However, to provide such a service, a company must obtain a license, which they cannot get unless they first obtain a registration service bond.
Certificate of Title Bond
This is a bond that ensures the legal validity and the ownership of a vehicle’s title. It’s usually required as a condition to register a vehicle with the DMV if the vehicle’s original title has been lost, stolen, or destroyed.
Typically, the vehicle’s owner will buy the certificate of title bond rather than an auto dealer.
The construction industry makes up a significant part of the surety bond market. Namely, contract bonds are most common in the construction industry. They are also sometimes called construction bonds.
What are the types of bonds used in the construction industry?
Contractor License Bond
With a contractor license bond, there’s a guarantee that a contractor will adhere to relevant laws and fulfill the contract terms.
Contract or Construction Bond
The contract or construction bond is one of the most common surety bonds issued in the US. They guarantee that a contractor will fulfill its obligations.
For example, paying the subcontractors and suppliers. Most contracts also require repairing any errors that might appear after the project is completed.
Right Of Way Bond
A right of way bond ensures that a contractor hired to work on a public infrastructure project, such as a street or a highway, follows all the local laws and regulations.
Let’s look at the most common types of surety bonds used in the transportation industry.
Freight Broker Bond (BMC-84)
A bond is a requirement for freight brokers before getting or renewing their license. The freight broker bond prevents fraud or failure to pay motor carriers and shippers on time.
Overweight and Oversize Permit Bond
A bond that guarantees that a freight carrier that hauls freight over a certain gross weight or size will pay the required taxes and any potential damage caused to streets and highways is called an overweight and oversize permit.
Driving School Bond
A specific driving school bond is required to ensure that driver-ed schools operate according to the law.
Household Goods Bond
Did you know that a bond is required to guarantee that a moving company will fulfill its contract and operate according to state laws? It is called a household goods bond.
In industries where the risks are higher, and there’s a need to protect all the parties from misconduct and fraud, surety bonds are required.
What’s more, in some cases, the law requires you to get a surety bond before you can start a business.
Therefore, having relevant information about surety bonds is essential for business owners and consumers. With this article, you now understand surety bonds and their application across different industries.