Basic Concepts About Surety Bonds You Must Be Aware Of

By | March 16, 2022

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How Do Surety Bonds Differ from Insurance?

Insurance and surety bonds are both used to compensate a party for financial loss. Insurance is a contract between an individual and an insurance company whereby the individual makes periodic payments to the insurance company, which, in turn, agrees to pay damages resulting from certain defined contingencies. 

A surety bond is a contract among three parties: the obligee who wants protection from the beneficiary, the principal who wants assurance that its contractual obligations will be met, and the third-party surety, who provides the money or security with which future liabilities of the principal may be satisfied. A single entity often serves as both principal and third-party surety; thus eliminating the need for two contracts.

A surety bond provides protection against losses, while insurance is designed to provide coverage against loss. A surety bond ensures that the principal will fulfill its obligations under the contract or agreement entered with each obligee, thus providing financial protection for the obligee should the principal default on his contractual responsibilities. 

Insurance protects an individual or business from financial loss due to unexpected accidents, illnesses, fires, and natural disasters by reimbursing them for expenses resulting from these catastrophes.

Whether it be determining premiums for insurance contracts or duties of a surety in issuing bonds; many states’ courts have created legislation that sets forth statutory criteria with which insurers must comply when setting rates (premiums). Statutes often establish when and how an insurer may use rates, such as providing premium increases to reflect the increased risk associated with a customer’s claim history.

What Kind of Financial Statements are Required to Get a Surety Bond?

All surety bonds are different, so the type of financial statements required to obtain one depends on your specific situation. Generally, to get a bond you must have an active federal tax identification number, be in business for at least two years, and have had more than $250,000 in gross receipts during that time period. You also need to have no liens filed against you by the state taxing authority.

Self-employed individuals are eligible for most bonds with minimal qualifications. Corporations can obtain many types of financial examinations but may be required to provide additional documentation not requested from other entities.

Royalty payments require similar information as self-employment income but can be difficult because there is little public data available regarding this industry. Since each bond is different, applicants are required to provide all financial statements. Applicants who successfully qualify for a surety bond are typically asked to sign an affidavit or similar statement attesting to their business integrity.

Can Surety Bonds Be Canceled?

Normally the cancellation process is initiated by the obligee of the other party and not the principal the one who warrants or promises. The other party will first give written notice to the principal that fails to rectify their default or breach of warranty. If still uncompleted after that, the next step will be to approach us for advice on how best we may assist them to cancel your bond.

Lack of communication from either side does not constitute such a notice, since there is no way for them to know whether you are even aware of it if contact cannot be established with you. That’s why we always encourage our clients not to just abandon their bond or security without further notice.

The cancellation of a surety bond is not the same as forfeiture, which usually comes in when the principal violates their obligation under the contract. In this case, the obligee may make claim to us for all sums paid out on account of forfeitures until then.

The process of canceling surety bonds can get complicated especially for those who are new at it and don’t know what to do next. We, therefore, offer our services to help you with that if necessary so that you won’t have your time wasted because there are other very important issues waiting to be taken care of instead.

Why Use a Surety Bond instead of a Letter of Credit?

A surety bond is considered by most to be the most reliable guarantee of payment in business transactions. The performance bond, sometimes called an agreement for a performance bond, contract bond, activity bond, or service bond, provides written assurance from a surety company that they will compensate any party adversely affected if the principal who signed the contract fails to perform as agreed.

This agreement usually follows a tentative decision or verbal commitment by an agent of a government agency to award a contract on one particular supplier’s bid with no other contenders being allowed to submit lower bids. The awarding authority requests that potential suppliers whose bids are “accepted” provide them with proof of financial responsibility via a performance bond. Such bonds are usually used in situations where there is significant risk involved. This includes big projects that are costly to the awarding authority or public body.

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