What is Surety Bond Insurance?
Surety Bonding is the provision of bonds or guarantees to protect a principal in a contract from contractor non-performance. If the contractor fails to meet their obligations or fails to complete the contract adequately.
A surety bond is an agreement that ensures compliance, payment, or fulfilment of an obligation to a principle. The three parties to a surety bond are:
- the contractor, (the bond principal), who is the party that buys the bond and is required to perform an act as promised,
- the surety, either the insurance firm or surety company that guarantees the performance of the obligation, and who will be contractually liable in case the principal violates the terms of the agreement, and
- the client (beneficiary or obligee) who benefits from the surety bond.
The bond money can be used to reimburse the principal for extra costs they have to incur. Surety Bonding is an essential part of many industries, such as commercial construction, civil construction & engineering process machinery supply/maintenance.
Why is Surety Bond Insurance important?
Surety bonds are often taken out by businesses or professionals who render services to consumers. The goal of a surety bond is to protect the parties to a contract by guaranteeing performance and/or obligations of the contract and to provision for any additional costs that may be incurred through the non-performance.
The principal who purchases a surety bond transfers the financial risk of not being able to perform the tasks and obligations stipulated in the bond, which instead makes the surety company liable for the unfulfilled obligations. Conversely, it also protects the client as it can collect compensation in the event of the principal defaulting on the agreement.
How does Surety Bond Insurance work?
In the event of a claim, the surety typically lodges an investigation. If the claim is proven valid, the surety will provide payment to the client, whatever is due to the latter.
The surety will seek repayment for the amount paid from the principal. If the principal claims the default is caused by a different party. The surety can act on behalf of the principal to collect payment and recover their losses.
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Frequently Asked Questions
Is the surety bond refundable?
Surety bonds are often non-refundable. Once it is signed and issued, the premium you pay cannot be returned. Surety companies typically do not prorate premium refunds in the event of a policy cancellation.
What does surety mean in insurance?
Surety increases the confidence of both parties entering into a contract by guaranteeing the performance and/or obligations of the principal and guaranteeing compensation for the client in the event of the principal’s non-performance of his obligations as stipulated in the contract.
What’s the difference between insured and bonded?
Being insured means having an insurance contract that protects you financially from loss and/or damage and legal liabilities. Being bonded means having a surety bond in place that guarantees compensation in the event of a contractor not meeting their contractual obligations.