Commercial bonds, also known as business bonds or surety bonds, guarantee that a contractor will fulfill the obligations of their contract. Bonds are often required by governments, entities, and legislation, and can help establish credibility by guaranteeing that work will be performed properly, on time, and in accordance with local, state, and federal laws and regulations.
There are three parties involved in the bond process:
- The principal – the party being contracted to perform work
- The obligee – the party that is requiring the bond
- The surety – the bond issuer who guarantees the performance of the principal
In the event that the principal defaults or otherwise fails to perform the work that they were contracted for, the obligee can file a claim with the surety.
Depending on their industry and the state in which they are located, many businesses and contractors may be required to be licensed and bonded before they can begin operating. These requirements help protect governments and the public from a principal’s failure to fulfill their contract.
Types of Commercial Bonds
License & Permit Bonds
A license and permit bond guarantees a principal’s compliance with local, state, and federal laws and regulations relevant to their industry and type of business. This is especially applicable to those working within the plumbing, electricity, and HVAC industries.
Public Official Bonds
A public official bond is required for certain holders of public office to guarantee that they will faithfully perform duties as prescribed by law. This also applies to Board of Education Members, as well as Tresturers of private and non-profit organizations.These bonds work to protect taxpayers who may need assistance or service from a public official
Notary Public Bonds
For those unaware, a notary public is a licensed person who is able to approve and witness signatures on legal documents. A notary public bond guarantees that a notary public will faithfully perform duties as prescribed by law, which protects the public against financial loss due to improper conduct or error.
Commercial Crime/Fidelity Bonds
Commercial crime/fidelity bonds protect employers from employee dishonesty. These fidelitybonds will pay for the loss of income or property due to employee misconduct. This misconduct can include theft, forgery, burglary, and fraud.
Client’s Property/Third Property Fidelity Bonds
A client’s property bond, or a third property fidelity bond, protects service contractors in the event that one of their employees steals a client’s money or property. Without a third party fidelity bond, you will find yourself, as the business owner, responsible for covering everything that was stolen.
Fiduciary bonds, also known as probate bonds, guarantee faithful performance from those who administer court-appointed trust, such as family members appointed as executors of a decedent’s estate, or an appointed guardian of a minor or incapacitated adult. Fiduciary bonds require the surety to pay fees if the fiduciary incorrectly performs or breaches their duties. These bonds serve as a form on insurance to ensure the fiduciary is acting in proper accordance with all laws and regulations.
A judicial bond, or court bond, guarantees that any damages, court costs, and attorney fees that result from court action will be paid for by the principals. Oftentimes, you may find yourself required to purchase a judicial bond before you enter a court proceeding.
ERISA/Pension & Profit-Sharing Bonds
Required by the Employee Retirement Income Security Act, ERISA bonds protect employee’s health and retirement plans against losses due to fraud or dishonesty. If an employee has access to funds in your employer-sponsored health and retirement plans programs, they must be covered for, at a minimum, 10% of the money they have access to.
Tax Preparer E&O Bonds
A tax preparer errors and omissions bond protects the public by guaranteeing that the tax preparer will operate with honesty and transparency, and not do anything that will cause their clients harm. Since tax preparers have access to so much of their client’s personal information, this type of bond serves as protection to ensure you will not be defrauded.
Bid bonds guarantee that the principal will fulfill their obligation to the obligee according to the terms of a written contract, particularly in the case when a contractor bids on a public project, such as a construction project.
A performance bond guarantees that the principal will perform work in accordance with the terms and conditions of their contract. Performance bonds can serve as a safety net for clients hiring a contractor.
Maintenance bonds guarantee that work will be performed without defects in terms of materials and workmanship. Maintenance bonds are typically issued in conjunction with performance bonds.
A supply bond guarantees that materials or equipment will be delivered as promised by the supplier; supply bondsusually include both performance and payment obligations. These bonds are typically required of all public construction projects with a budget exceeding $100,000.
A customs bond guarantees all duties, taxes, and necessary fees are satisfied to customs when importing commercial goods into the United States over $2,500. Commonly referred to as an imports bond, custom bonds are also required when importing goods subject to government regulations.
Hanson & Ryan Can Help!
As you can see, there any many different types of bonds, all with their own unique requirements. At Hanson & Ryan, our team of insurance experts has a comprehensive understanding of the different types of commercial bonds and what each can do. If you’d like some additional information or to speak with a representative of the Hanson & Ryan team, reach out to us at your convenience!