Surety bonds are required in certain circumstances for different individuals and entities. Most surety bonds must be purchased by individuals and businesses that are required to carry the bond.
License and Permit Bonds
A license and permit bond is generally used by individuals and businesses who require a bond to obtain a certain license or permit. These bonds guarantee that the person who purchases the bond will comply with local regulations, statutes and/or ordinances. Contractors and businesses who wish to conduct certain types of business may need to purchase this bond. Common license and permit bonds include:
Freight Broker Bond
Construction bonds must also be purchased by contractors and other professionals. This type of bond is usually required by the entity who is hiring a contractor to complete a certain job. For example, say a government entity hires a construction company to build a new park. The government entity may require the construction company to purchase a construction bond.
There are three main types of construction bonds:
Bid Bonds: A bid bond concerns contracts that are won in a bid. If a contractor is hired through a bid, a bid bond guarantees that the contractor will complete the construction project as agreed upon through the contract initially bid on.
Performance Bonds: A performance bond is similar to a bid bond but applies to situations where a bid is not involved. Performance bonds are an agreement between the surety, the contractor and the business hiring the contractor that guarantees a hired contractor will complete a job as agreed upon. If the contractor cannot complete the job they are hired for, the surety will step in to compensate the business who hired the contractor.
Payment Bonds: A payment bond guarantees that subcontractors and suppliers will be paid for their work while carrying out a contractor for a client.
Fidelity bonds are different than the previous bonds. While the other bonds are primarily for the benefit of a client, fidelity bonds are suited to protect the business who purchases it. Fidelity bonds primarily cover against loss due to fraud and/or dishonesty. This may include claims of theft, embezzlement, forgery, misappropriation, larceny and more.
There are three main types of fidelity bonds:
Dishonesty Bonds: A dishonesty bond protects a business against financial loss caused by an employee’s (or group of employees’) fraudulent activities. If an employee steals money from the business, for example, this insurance can help cover legal fees in case of a lawsuit and any other damages related to the incident.
ERISA Bond: ERISA bonds refer to the Employee Retirement Income Security Act. This bond is required for those who handle employee benefit plans. It serves to protect employee benefits and other plans in case of fraudulent activity committed by someone handling the plans.
Name Schedule Bonds: A name schedule bond is similar to a dishonesty bond. Where a dishonesty bond is blanket coverage for all employees, however, name schedule bonds allow employers to name specific high-risk employees. High risk employees may include those who are responsible for handling large amounts of cash, funds or other resources.
Any business owner with employees may consider a bond. If your business has employee benefits plans, you may be required to purchase an ERISA bond.
Who Pays for a Surety Bond?
In most cases, the individual or group that is required to carry a bond must purchase the bond. This doesn’t mean that they have to pay for the entire thing, however. Usually, a surety calculates how much a business or individual must pay based on the type of bond, the value of the project (if applicable), credit scores, etc. The one seeking the bond will then pay a certain percentage of that bond, such as 1-2%. For example, say you must purchase a $300,000 construction bond. The surety quotes you to pay 1%. Instead of paying all $30,000 for the construction bond, you will instead pay around $300.
If you own a business or operation, you will likely need some type of bond in order to obtain licenses or operate. Bonds are generally used to guarantee that individuals and businesses will operate as intended, such as paying taxes on liquor, finishing a construction project based on the initial contract, etc.
Be sure to speak with an agent from a surety about the possible surety bonds you may need to run your business.