What Is A Surety Bond?
A bond guarantees the fulfillment of a legal obligation. It's a three-party agreement where the third party (surety company) guarantees to a second party (obligee or owner) the successful performance of the first party (principal). Obligee is a technical word for a beneficiary, who might be the project owner, government agency, etc. The Surety is the party standing behind the performance of the Principal. The Surety has evaluated the Principal's ability and willingness to perform and is providing their stamp of approval with a bond. If the Principal is unable to satisfy the terms of their agreement, the Surety assumes the responsibility and reimburses the Obligee. One of the primary uses of bonds today is to protect public and private funds from financial loss.

A surety bond is not an insurance policy. An insurance policy assumes that there will be a loss, so the premium for an insurance policy is calculated to cover losses that will occur. A bond, on the other hand, is an extension of credit with the assumption that the legal obligation will be fulfilled, and consequently, there will be no loss. The bond premium paid to the surety covers only the underwriting expenses of the surety company.  The Principal is the primary responsible party under the bond, and must agree to reimburse the Surety for any claims or expenses they incurred because the Principal has not lived up to their agreement.

What type of bonds are there?
Bonds can be broken into the following broad categories: Contract, Commercial and Fidelity.

Contract Bonds can be required by statute or by private agreement. Some examples would include:

• Bid Bonds guarantee the bidder's promise to enter into a contract in the event their bid is accepted.
• Performance Bonds can be required for construction, supply or service contracts, and guarantee the principal will perform in accordance with the terms and conditions of the contract, purchase order, or service agreement.
• Payment Bonds are usually paired with Performance Bonds, and are required to guarantee that all suppliers and laborers on a bonded project will be paid.

Commercial Bonds are generally required by statute, and guarantee some aspect of the Principal's operation. Some examples would include:

• License and/or Permit Bonds are required by government entities and basically protect against consumer fraud or assure public safety.
• Union Welfare Bonds guarantee the contractor will stay current with their union dues, wage and fringe benefit payments.
• Tax Bonds are required by government entities and guarantee that the principal will pay their taxes in accordance with the governing law.
• Court Bonds can be required of either party in a lawsuit, and guarantee the principal will pay any settlement or damages the court awards against them. An example of a court bond commonly required by small contractors is to release a mechanics lien.
• Miscellaneous Bonds generally guarantee the financial performance of many forms of agreements.

Fidelity Bonds protect the employer from dishonest acts committed by their employees. Some examples include:

• Janitorial Services Bonds provide protection for customers of cleaning businesses. Employees are easy targets for blame when something is missing since they have access to customers' assets, equipment, supplies and personal belongings.
• Employee Dishonesty Bonds guarantee that the bonded employee(s) will handle their employer's money and property with trustworthiness. Small companies can be especially hard hit because they can't afford extensive safeguards and do not have the financial capacity to absorb the losses.
• Pension Trust (ERISA) Bonds are required by The Pension Reform Act of 1974, which states that the fiduciaries of a pension or profit sharing fund are required to post a bond for 10% of the amount of funds handled. Pension plans and profit sharing programs are managed by appointed individuals known as plan fiduciaries.

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