Surety bonds protect consumers and government entities from fraud and malpractice by providing financial guarantees that business deals and contracts will be completed according to mutual terms.
When a principal breaks a bond's terms, the harmed party can make a claim on the bond to recover losses. There are four types of surety bond, and each lends itself to its respective field: License & Permit Bonds, Construction Bonds, Commercial Bonds, and Court Bonds. Each surety bond issued acts as a three-party contract between a principal, and oblige and a surety:
A business owner or other professional purchases the bond to guarantee the quality of work to be done in the future
Most of the time a government agency, requires the principal to purchase a bond to avoid potential financial loss
A surety bond company, issues the bond and financially guarantees the principal's capacity to perform a specific task
Before contacting a surety provider, it is important to check all federal, state and local regulations regarding surety bonds in their respective industries. Regulations regarding a specific surety bond in California will vary from those that apply to a surety bond in Texas.
Contract bonds can be used for many reasons; however, they are most commonly used in the construction industry to ensure projects are completed according to contract – one of the reasons the two terms are used interchangeably.
Commercial bonds are typically purchased by companies and working professionals who need surety bonds for purposes unrelated to legal issues, construction projects or other contracted work. Most commercial bond types are used to reinforce laws – most commonly license and permit regulations.
License and permit bonds are a specific type of commercial bonding. These bonds are required by government agencies to specify that business owners in certain industries must purchase these bonds before they can be legally licensed.
Most court proceedings require that certain parties post surety bonds to limit the potential for the financial loss that could result from judgments. “Court Bond” is an overarching term that includes bonds used for a number of different court proceedings.