How Do Surety Bonds Work?

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What Is a Surety Bond?

A surety bond is an agreement between three parties to ensure that a promise is kept. A surety bond company guarantees completion of a certain legal obligation by one party to another. An example would be in the field of construction. If you have a contractor building your new home, you want to make sure that he is bonded. This tells you that a surety bond company is present to guarantee the contractors legal obligation to you.

Types of Surety Bonds

There are different types of surety bonds. Each does something slightly different. Bail or court bonds make sure that a person follows the rules of the court or bail terms. A contract bond ensures that the person or company that has entered into a contract will fulfill the promises set forth in the contract. License and permit bonds make sure that the person holding the permit or the license conducts his business practices in accordance with the regulations of the license. A subdivision bond ensures that land developers stick to their legal obligations by providing proper waste disposal and land improvement in accordance with state laws.

How Surety Bonds Work

A surety bond provides a merchant backing in terms of both financial issues and reputation. A businessperson will purchase a surety bond from a bonding company. When that merchant goes on to conduct business with his customers, the customers feel safer knowing there is a guarantee for the work they are hiring this merchant for. For example, if an art gallery hires a cleaning service to tidy up after business hours, it is comforting to know that the cleaning business is bonded. If something should break, it is covered. Surety bonds are much like insurance policies. The major difference is that surety bonds give their protection to the customer, not the bond holder.

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