What Is a Broker Surety Bond?
In a surety bond, 3 parties are involved--the principal, the obligee and the surety. A surety bond entails a contract between the principal and the obligee, according to which the principal agrees to fulfill a commitment to the obligee. The surety has the task of ensuring that the principal fulfills the commitment. If the principal in unable to do so, it falls upon the surety to fulfill the commitment. This commitment is a payment of some sort in a broker surety bond.
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Types
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There are a various different types of surety bonds. The 2 main types of surety bonds are commercial bonds and contract bonds. Commercial bonds assure that the terms of a bond will not be violated by the principal. (An example is the contract between an employer and an employee, in which case the employer is the obligee and the employee is the principal.) Contract bonds provide assurance that the contract is fulfilled, for example, as in a construction contract. There are several other bonds with sub-categories of their own like fidelity bonds, license bonds, court bonds, customs bonds, auto dealer bonds and so on.
Function
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The earliest surety bonds were used during the 12th century for trade between different countries. Since the laws of international trade hadn't been introduced back then, surety bonds gave the opportunity to different countries to carry out relatively risk-free trade with each other. The broker surety bond gives 2 parties an opportunity to deal with each other in such a way that guarantees a successful relationship, which might have not been possible any other way.
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Identification
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A surety bond gives the obligee safety from unforeseen circumstances, but it is not unlimited safety. In the case of a broker surety bond, there is a limit to the amount of money the surety is responsible for paying the principal, called the penal sum or bond's penalty. A surety bond is different from insurance in that the principal has an agreement with the surety that states that it cannot legally protect itself from any claims from the surety in case of non-payment.
Benefits
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There are several reasons why surety bonds are in use today. They are most often used in the construction industry. Contractors who are responsible for the construction must take out a surety bond to be eligible for a construction contract from the owners. This ensures that the construction will be carried in a timely manner because everyone is guaranteed proper compensation. If there is no surety bond, the contractors might stop construction unless they are paid. This can delay the construction and cost both parties time and money.
Warning
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Broker surety bonds are not without their shortcomings. There is always a chance that the principal might not be able fulfill the responsibility. If it turns out that the surety itself is bankrupt, the bond becomes invalid. Therefore, the surety is usually an insurance company or bank that has been verified to have access to the required funds.
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