A surety bond is simply defined as a three-part agreement that legally binds together a principal who desires the surety bond, an obligor who desires the surety bond, and a surety organization that sells the surety bond. The surety bond ensures that the principal will perform according to certain legal laws pertaining to surety business activities.
There are various types of surety bonds available in the market, all of which vary in their legal obligations and consequences if the principal and obligee fail to fulfill their obligations. Surety bonds play an important role in the legal system to ensure that the interests of the obligee are protected. Surety bonds are commonly applied in the real estate, motor vehicle, and aviation industries. They are also used to guarantee payment of financial obligations such as debt payments, medical bills, and personal property tax obligations.
Surety bonds are required for many transactions and are not at all difficult to acquire. In general, all lenders require a surety bond when providing a loan to any person. When the principal fails to pay the secured amount on the agreed time, the lender can institute a procedure by which the principal can be held liable for the amount due. Surety bonds can also serve as legal evidence of the reliability of the principal and thus support his position in the eyes of other individuals, organizations and governments. Failure to deliver surety results in the loss of the guaranteed amount by the borrower.
When a principal fails to comply with certain legal obligations, his obligee may demand enforcement of the obligee's rights under the surety bond. If the obligee is a consumer, surety bonds provide him with protection when he fails to obtain needed goods or services. Surety bonds are typically issued to assure the timely delivery of goods or services, particularly those that are of a financial nature. Surety can also be used to protect the principal from damage or loss caused by an individual who harms his or her principal.
Under a contractual surety bond, the obligee pledges a specific amount of principal in exchange for certain rights with respect to the principal. These rights typically include but are not limited to remedies for breaches of contracts. Surety protects the principal by ensuring that the principal is protected from losses that would otherwise occur in case the contract does not materialize. An example of a contractual surety bond is the contract surety bond between a real estate broker and the principal.
Contract surety bonds are often used before construction contracts in order to ensure that the obligation does not create unforeseen delays in the construction process. For example, if a contractor intends to construct a hotel, he will typically set up a construction contract surety bond with a bonding company. If the project is delayed for any reason, the bonding company would then pay off the principal in full to avoid the delay. In this way, the contractor avoids financial harm that would otherwise arise from a breach in the construction contract.
Employee dishonesty is also a very common occurrence in businesses. Some employees engage in deceitful acts in an attempt to get ahead or gain an advantage over their fellow employees. Surety bonds provide an incentive for honest employees, thus preventing employee dishonesty at the workplace. In fact, most corporate board members are required to undergo Surety Bonding, whether they have a direct stake in the company or not.
Many businesses require Surety to prevent employees from creating a public perception that could harm the company. For example, many companies may require Surety Bonding as a condition of employment. Surety Bonding prevents the employee from misleading investors by providing a proof that the principal has a specific and binding financial agreement with the obligee. Surety bonds also provide Surety Company with a record of the obligee's payment of principal and interest on the debt.
Many individuals are unfamiliar with Surety Bonding, and many companies are not sure how to obtain Surety bonds. Most commercial surety bonds are generally provided by the same companies that create the policy. If you are interested in obtaining surety bonds, contact your local commercial bonding agent. They will be able to guide you in the right direction. Additionally, if you have a business plan, it is often required that the agent create a proposal for the proposed business. The agent may also be able to present the proposal to the obligor during the process.