Different Types of Commercial Bonds – A Comprehensive Overview
There are many different types of commercial bonds. However, they can be broken down into three main categories: license and permit bonds, construction/contract bonds, and court bonds.
These commercial bond types assure that a person or business will perform its services professionally and ethically without fraud, dishonesty, or deception. These bonds protect the public and ensure licensed professionals uphold federal and local regulations.
License and Permit Bonds
License and permit bonds are a type of surety bond that protects people from harm caused by businesses that violate state rules. They also protect consumers and government agencies from financial losses caused by illegal or unethical business practices.
These bonds are generally required before a business can get a license or a permit from the local government to do certain work. They guarantee compliance with codes, laws, and ordinances and may also guarantee that any damage to surrounding areas will be repaired.
Three parties are involved in the bonding process: the principal (the person who purchases the bond), the obligee (the company or government body that needs the bond), and the surety. If the principal breaks a commitment or violates the bond requirements, the surety swears to pay the obligee a specific sum.
Those unfamiliar with getting a bond may find it difficult to understand. Your free, no-obligation quote will be given to you along with guidance from our qualified professionals.
Fidelity Bonds
An example of a surety bond is a fidelity bond, which shields companies from losses brought on by employee fraud and theft. This insurance covers any forgery, fraud, or theft that can result in a financial setback for a corporation, depending on the type of bond.
These types of bonds are a common part of risk management strategies. They also help businesses reassure their clients that they are protected against dishonesty or fraud.
The most popular types of fidelity bonds are business service and employee dishonesty. These policies are often used by window repair, janitorial services, security guards, pest control companies, and many other contractors.
Another type of fidelity bond is the ERISA bond, which protects retirement-plan beneficiaries from being scammed by trustees. These bonds are required under federal regulations and must cover 10% of the funds they manage. They can be helpful for businesses that send their employees to client sites frequently or those with retirement plans that require them to manage funds on behalf of others.
Performance Bonds
Project owners require performance bonds to ensure contractors perform the contract according to the terms and conditions. They are also sometimes required by state and federal government entities that have a contract with the contractor.
A contractor must engage with a surety company to obtain a performance bond. The contractor agrees to pay a small percentage of the project’s value, usually between 1% and 4%.
Once the bond is obtained, the project owner can file a claim against it to receive compensation for damages and other losses caused by a failed performance by the contractor. The claim can be filed by a project owner or the state issuing the bond.
Like any surety bond, a performance bond has three parties: the principal (the contractor), the obligee, and the financial institution that provides the bond. When the obligee files a claim against the bond, it is sent to the financial institution, determining how much money should be paid to the obligee and the contractor.
Maintenance Bonds
When a contractor wins a construction contract, they usually have to obtain a maintenance bond to guarantee they will maintain the quality of work they agreed to in the original contract. It is like a warranty bond but protects the client against poor workmanship and faulty materials.
A maintenance bond also guarantees that the contractor will correct any shoddy work that comes up during the project or that they will reimburse the owner for the repairs that are required. This type of guarantee, a warranty or construction bond, can be issued for varying periods.
The length of the maintenance bond is often a major factor in determining the rate you can get for your bond. Surety bond companies want to refrain from writing long-term warranties as construction changes quickly. However, there are instances where they will offer a longer guarantee, particularly for public works.