You, like most individuals, may not have ever heard of using a bond, but they can be valuable options. However, if you have ever entered into a contract with another person, you may have purchased or required the other party to secure a bond to protect you from financial loss. This is what you should know about these financial tools.
What Are These Bonds?
These bonds are simply insurance for legal agreements between two parties: the principal and the obligee. You are the principal if you will pay the obligee upon the completion of a task. You are the obligee if the principal will pay you for a specific job. The surety is the company that guarantees that you will be paid for your work when it is completed.
How It Works
If you are the principal, you apply for a bond with a surety company. Then, you can work with the obligee to determine the terms of your contract. When the work is completed, you pay the obligee. Because surety bonds are a form of insurance, if you do not pay the obligee, this individual can sue the surety company and recover the fee. However, the surety company has a legal right to pursue reimbursement from you.
Let’s say that you are a building contractor and need to hire an electrician, but your subcontractor doesn’t trust you to pay when the job is done. Therefore, you go to a surety company to purchase an insurance (a bond). Then, you and the electrician sign the contracts. When the work is done, you pay the contractor. However, if you do not pay the subcontractor, he can go to the surety company and get his payment as long as the work is completed according to your contract. Then, the surety company will come after you for reimbursement of the full bond.
Common Bonds for Contract Fulfilment
As in the above example, if you hire contractors or subcontractors, you may purchase several types of bonds. However, some contract bonds are required. For example, the Miller Act requires publicly funded projects that are worth more than $100,000 to be bonded, but some states require bonds for projects as low as $5,000.
Common contract bonds include those for the bidding process. If you are bidding on a project and accept your bid, you are legally obligated to fulfill the contract. The bond protects the project developer in case you choose not to fulfil the contract. If you hire someone to complete a project, you may purchase a performance bond, which protects you if the project is not completed properly. According to the contract, payment bonds protect contractors if you choose not to pay them after they complete their work.
Common Bonds for Commercial Enterprises
These bonds are required in several industries. For example, auto dealerships are required to purchase bonds to prevent fraud. In addition, contractors and mortgage brokers must buy bonds. Medicare bonds are used in order to avoid malpractice in medical supply manufacturers.
Finally, state and local sales tax bonds must be purchased by businesses. In addition, service bonds may purchase bonds to protect employers from high-risk employees. They protect against financial or property loss. Utility bonds ensure that utility company clients pay their entire bills on time. Finally, cleaning services may also purchase janitorial bonds.
If you have ever been through the court process, you have encountered legal bonds. Appeal bonds guarantee that your lawyer is paid even if you don’t win your court appeal. Probate or fiduciary bonds ensure that assets are appropriately distributed among a person’s beneficiaries. When you gain guardianship over children or individuals, a guardianship or custodian bond guarantees that you manage their finances properly.
If you are concerned about a financial loss or work with someone who may be unsure of your ability to pay for services rendered, learn more about surety companies and the bonds they offer.