Surety bond

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A surety bond is issued by an entity on behalf of a second party, guaranteeing that the second party will fulfill an obligation or series of obligations to a third party. In the event that the obligations are not met, the third party will recover its losses via the bond.

Contents

[edit] Overview

A surety bond is a contract among at least three parties:

  • The principal - the primary party who will be performing a contractual obligation
  • The obligee - the party who is the recipient of the obligation, and
  • The surety - who ensures that the principal's obligations will be performed.

European surety bonds are issued by banks and are called "Bank Guarantees" in English and "Caution" in French. They pay out cash to the limit of guarantee in the event of default of Principal to uphold his obligations to Obligee, without reference by Obligee to Principal and against obligee's sole verified statement of claim to the bank.

Through a surety bond, the surety agrees to uphold — for the benefit of the obligee — the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement.

The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.

If the principal defaults and the surety turns out to be insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an insurance company whose solvency is verified by private audit, governmental regulation, or both.

A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly.

Surety bonds are also used in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.

Annual US surety bond premiums are approximately $3.5 billion.[1] State insurance commissioners are responsible for regulating corporate surety activities within their jurisdictions. The commissioners also license and regulate brokers or agents who sell the bonds.

[edit] History

Individual Surety Bonds are the original form of suretyship. The earliest known record of a contract of suretyship is a Mesopotamian tablet written around 2750 BC. There is evidence of Individual Surety Bonds in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, the ancient Hebrews and later England.

The Code of Hammurabi, written around 1790 BC, was the first time suretyship was address in a written legal code.[2]

It wasn't until 1837 that the first Corporate Surety was organized, The Guarantee Society of London.

In 1865, the Fidelity Insurance Company became the first US Corporate Surety company, but the venture soon failed.

[edit] Use

Generally, surety bonds are classified as contract, commercial, or fidelity, as follows:

  1. Contract bond, used very frequently used in the construction industry is a guarantee from a Surety to a project's owner (Obligee) that a general contractor (Principal) will adhere to the provisions of the terms of the contract. Examples of these types of bonds include bid bonds (guarantee that a contractor will enter into a contract), payment bond (guarantee that a contractor will pay for services and materials), performance bond (guarantee that a contractor will perform the work as specified by the owner), and maintenance bond (guarantee that a contractor will provide faility repair and upkeep for a specified period of time.) Under the Miller Act, payment and performance bonds are required for general contractors on all U.S. federal government construction projects where the contract price exceeds $100,000.00.
  2. Commercial, license, or permit bond, usually required by law, are a guarantee from a Surety to a government and its constituents (Obligee) that a company (Principal) will adhere to the provisions of applicable codes and laws that apply to particular activities. The company could be a contractor, a health spa, title company, notary public, etc. For example, an Importer Entry Bonds is required on all commercial shipment of goods entering the commerce of the United States. An Importer Entry Bond is a customs bond posted by an importer to guarantee the payment of import duties and taxes, and to assure compliance with any pertinent law, regulation or instruction. It may be written as either a single transaction or continuous bond (self-renewing). The bond amount for a continuous bond is determined by taking multiples of $10,000 nearest 10% of duties, taxes and fees paid by an importer during the last calendar year. The minimum continuous bond amount is $50,000.
  3. Bail bonds are a type of surety bond used to secure the release from custody of a person charged with a criminal offense. Under such a contract, the principal is the accused, the obligee is the government, and the surety is the bail bondsman, and if the accused fails to appear, a fugitive recovery agent is the surety.

Fidelity bonds are really insurance policies that protect an employer from the dishonest act of an employee.

[edit] Examples

Examples of Surety Bonds:

Examples of fidelity bonds:

[edit] License and permit bond

License and permit bonds are a general class of surety bonds required of a person or entity to obtain a license or a permit in any city, county, or state. These bonds guarantee whatever the underlying statute, state law, municipal ordinance, or regulation requires. They may be requirements for a licensed driver to be present in the vehicle; for example, Judy is a licensed driver and her guardian is anywhere in the automobile, not necessarily in the front or back. Certain taxes and fees and providing consumer protection may be required as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.

[edit] See also

[edit] References

  1. ^ "About the Industry". The Surety & Fidelity Association of America. http://www.surety.org/main.cfm?catid=2&lid=0. Retrieved 2009-07-17. 
  2. ^ "The Importance of Surety Bonds in Construction". Surety Information Office. http://www.sio.org/html/importance.html. Retrieved 2009-11-09. 

[edit] External links

Surety Bonds at the Open Directory Project

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