A surety bond is a contract among three parties. The first party, called the surety, agrees to pay a stated sum on behalf of another party (the principal) to a third party called the obligee if the principal should fail to meet the terms of an agreement or contract between the principal and the obligee. Usually, the surety is a division or subsidiary of an insurance company. In the event the surety must forfeit the bond, it may take legal action to recover the funds from the principal.
What Are the 4 Types of Surety Bonds?
There are dozens of different types of surety bonds. And since many have different requirements in each state, there are actually hundreds or thousands of different types of bonds. Keeping track of all the details can seem daunting. Fortunately, almost every type of surety bond falls into one of four different categories.
- Contract Bonds – Contact bonds hold one party in a contractual agreement responsible if they don’t meet terms established by another party. This type of surety bond is often required for construction projects, but they can factor into other contractual arrangements. Since contract bonds facilitate the smooth execution of a contract – and hold the wrongful party accountable when things don’t go smoothly – they’re one of the most common types of surety bonds.
- Commercial Bonds –Different types of businesses and professionals need a commercial bond before the state recognizes them as a legal business entity. Typically, someone needs to obtain a commercial bond before the state will grant them a license. States use commercial bond requirements to ensure that professionals abide by legal and ethical behavior, and face accountability when they don’t.
- Court Bonds – A judge may require someone to obtain a court bond before allowing legal proceedings to move forward. The court bond holds the bonded party financially liable if they fail to act in a manner required by the court. Court bonds are most common in civil cases.
Fidelity Bonds – Fidelity bonds protect a business and its clients if an employee of that business acts unlawfully. Unlike commercial and court bonds, businesses aren’t required to get fidelity bonds, but many consider it a prudent way to manage risk. Fidelity bonds also operate like an insurance policy, meaning they pay the bonded party, which differs from other types of surety bonds that hold the bonded party financially liable.