There are many different types of surety bonds that are required by an obligee. Three parties involved with a surety bond include the obligee, the principal, and the surety company. The obligee is the party requiring the principal to be bonded, and the surety company is the party that insures the bond.
For most bonds, the obligee is the state, city, county, or federal government. The principal is legally bound to the surety bond, and if the principal acts against the bond, a claim can be taken against the bond which the surety company will pay out. Then , the principal is responsible for repaying the surety company for the paid claim.
It can be tricky to figure out what type of surety bond that is required for an individual or a business, so this guide will cover the most popular types of surety bonds. Surety bonds are always a requirement, so if the type of surety bond required is unclear, the obligee can be a resource to providing the bond type.
The bond types that will be covered in this article will be license and permit bonds, court bonds, and construction (contract) bonds.
License and Permit Surety Bonds
These bonds need to be bought before the business can legally be licensed. Without a business license, it is not legal for a business to assist customers and to receive payment for that service.
License and permit bonds protect customers because the bond guarantees that the business will abide by laws and regulations enforced by local, state, and federal agencies. These bonds also ensure that the bills and fees will be paid on time, such as utility bills, taxes, employee wages, etc.
For this type of bond, the obligee is the government agency requiring the bond, the principal is the business that must be bonded, and the surety company is the party that insures the bond.
Examples of License and Permit Bonds
- Auto Dealer Bond
Almost every state requires their own form of an auto dealer bond. This bond can be referred to as an automobile bond, a motor vehicle dealer bond, a DMV bond, or a used car dealer bond. The exact name of the bond depends on the state the business is located. For example, in California, this bond type is referred to as a California Motor Vehicle Dealer bond. The bond’s purpose is to protect customers from fraud or misconduct committed by the auto dealer.
- Freight Broker Bond
Another term for this bond is a BMC 84 bond or an ICC broker bond. Freight broker and freight forwarders are required by the Federal Motor Carrier Safety Administration (FMCSA) to be bonded. A $75,000 bond amount is required to be filed before the broker and forwarder can receive a license.
- DMEPOS Bond
In 2009, the Centers for Medicare and Medicaid Services (CMS) began to require this bond for all DMEPOS suppliers. DMEPOS stands for durable medical equipment, prosthetics, orthotics, and supplies. Before being allowed to bill Medicare, CMS requires a $50,000 bond to be filed by the supplier. This type of bond can also be referred to as a Medicaid bond or a Medicare bond.
- Notary Bond
The main function of a notary public is to invest their power to witness a signature, administer oaths and administrations, as well as a few other tasks. Since notaries hold a great deal of power with their signature, some notaries are required to be bonded. This bond ensures the notary will carry out their duties legally by covering the damages sustained by anyone who is affected by the notary’s misconduct or negligence. The bond amount varies depending on the state that the notary will be conducting business.
- Cannabis Bond
Businesses need to acquire this bond before they are legally allowed to open a medical or a retail marijuana dispensary. Each state requires a particular type of marijuana surety bond. The number of bonds each have a different purpose and scope for the licensing or medical and recreational marijuana dispensaries. Cities and counties require their own bond forms in addition to the forms that are required for licensing at state level.
Court Bonds (Civil)
Court bonds fall under two general categories: judicial/civil and probate/fiduciary. There are also subcategories within these two main categories. Court proceedings inform certain parties they must get a specific bond in order to verify their financial and personal integrity.
A judicial court bond is required in order to deny any and all uncertainties within court proceedings which would lead to losses resulted from a ruling. Since the surety company cannot predict the outcome of a court ruling, this type of bond can be more difficult to qualify for or considered less risk-adverse.
There are two subcategories of judicial surety bonds:
Individuals may be told to get an appeal bond before the court will agree to hear a case. The bond guarantees the original judgment will be paid in full if the appeal is denied. Courts require this bond to ensure that the court’s time will not be wasted on unimportant appeals.
When a plaintiff wants to attach the defendant’s property as security for a pending claim, an attachment bond is required. When this happens, the sheriff takes possession of the defendant’s property before the case goes to trial. However, if the court rules that the property was wrongfully taken from the defendant, the surety bond would cover any loses or damages by the plaintiff.
Court Bonds (Fiduciary / Probate Bonds)
Fiduciary or probate bonds refer to an individual that is appointed to care for someone else that cannot take care of themselves. The surety bond ensures an individual will fulfill the court’s requirements including managing an estate, finances, and other court-appointed tasks. Individuals that are appointed by the court to manage another person’s assets or to take care of someone are required to get this bond. The court requires a surety bond to be filed in order to ensure the guardian will handle their duties legally while following the court’s standards.
There are three subcategories of fiduciary/probate bonds:
- Guardianship and Custodian
Guardianship bonds are a type of Probate/Fiduciary bond, and are also commonly referred to as custodian bonds. Individuals appointed by the court to care for others and to manage their assets may be required to file this bond first. It guarantees the guardian will accomplish their duties legally and honestly while abiding by the court’s expectations. Ensuring the guardian will take care of a needy individual and will lawfully manage the individual’s property or financial accounts is ensured by the bond.
- VA Fiduciary
VA Fiduciary bonds allow friends and family of veterans the legal ability to act as the veteran’s fiduciary. The U.S. Department of Veteran Affairs allow the people who are close to the veterans the power to control the veteran’s finances, benefits, and estate. Examples of duties include paying the veterans’ bills on time or making sure the benefits paid to the veteran are collected and distributed legally. Large fees that are usually charged by the fiduciaries who work for the court cannot charge fees in this case. The premium for this bond type depends on the applicant’s credit and value of what they will be managing.
An executor bond guarantees the estates of the deceased will be managed according to their will. The executor will be determined based on who is stated to do this in the will of the deceased. The court that is responsible for the estate may require an executor bond to be filed first in order for the executor to be legal. Executor bonds need to be required and filed by the court. Factors that play into the bond premium are the estate’s value, the coverage amount, and the executor’s (principal’s) credit.
Construction (Contract) Bonds
A construction bond can also be called a contract bond since the bond guarantees the contractor working on a construction project will fulfill his/her promises of the contract. If the contracted party does not abide by the contract and the bond, a claim can be filed against the bond and their license could be taken away.
The most common use for this bond is to make sure a job will be legally completed as promised by the contractor. In the duration of the project, the project developers may require the contractor be bonded by several different types of bonds. These bonds include a bid, supply, payment, and performance bond. There are many more bond types, although the bond types mentioned are the most common.
- Bid Bonds
Contractors are guaranteed to submit a bid proposal with this bond. Project developers are reassured by this bond since it guarantees the bidders are financially credible to accept the job. The project developer can make a claim against the bond if a bid is selected but the contractor declines the job or retracts the bid.
- Supply Bonds
The suppliers must provide materials, supplies, and equipment within the specific job order. If the supplier fails to do their part within the contract, the bond will reimburse the supply purchaser.
- Payment Bonds
With this bond, contractors are legally bound to guarantee proper payment for services if the contractor goes bankrupt while working on a project. Suppliers can be reimbursed and subcontractors can be paid for their work with this bond if the contractor is unable to.
- Performance Bonds
Performance bonds are similar to payment bonds, although they guarantees promised job performance instead of promised payment for the job. The project developer can file a claim against the bond if the contractor fails to complete the job. The bond will pay for a second contractor to complete the work.
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Surety1 provides all bonds for business, licensing, construction, permit, and court purposes. To get started, apply online for the bond that you need.
1. Complete an online application.
2. One of our surety experts will call and email you with the firm quote and an agreement to sign.
3. Provide payment and your signed agreement, then you will receive your bond!
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