Why Surety Bonds Are Such A Valuable Business Tool

There are few uncomplicated protections for contract holders in modern times. The court system does attempt to help iron out disagreements between businesses and purchasers, but even these solutions might result in costly damages to the buyer. Another protection which is often not considered is the surety bond.

Surety bonds are contracts formed between three separate groups. The seller or "principal" party is responsible for fulfilling the requirements set forth by the contract. The consumer or "obligee" party will receive the contract obligations performed by the principal party. Finally, the surety party makes sure that the principal party fulfills his obligation to the obligee party.

Here is a simple example. Say you create an agreement with a construction business to build a house. The contract states that the architectural plans must be strictly followed to the letter, from building materials to design. Before authorizing the job, however, the agreement is forwarded to a surety bond company. In the event that the construction company does not follow the specifications to the letter, you can file a claim with the surety company.

If the claim is approved after an investigation, the surety company will charge the construction company for each deviation from the original agreement and legal costs associated with collecting on the surety bond. The surety bond business will then pay you for problems caused by the construction company. So you can see, a surety bond is a type of insurance policy which helps customers to have faith in the company performing the job.

Surety bonds are even more similar to insurance because the principal party most often pays a premium for surety bond credit. These premiums are retained by surety bond companies (minus their expenses) to create financial strength. In the event that the principal party does not comply with the original agreement, this financial power is used to pay the claim filed by the obligee party.

An industry commonly associated with surety bonds is, in fact, the construction business. Because contracts can take several years to finish and are very often exorbitantly expensive, surety bonds provide a guarantee to the purchaser that the work will be completed properly and to design.

This is even more necessary when the customer is a city or state government. According to the Miller Act in the United States, surety bonds are required for general contractors working on federal government building projects if the cost of the agreement is more than $100,000.