Bonds make it possible for businesses to function because they guarantee performance and honesty to potential customers. Bonding companies provide the deep pockets to financially back up a company’s commitments. As not every person or business can qualify for every bond they seek, the ability to secure a bond can be an indication of a company’s honesty, ability and good financial standing.
Bonds are not insurance, but they have a few things in common. Both bonds and insurance are contracts that make a formal promise to pay for something that hasn’t happened yet. Both pay money in the event of a covered event or occurrence. Both are written by insurance companies and sold by licensed insurance agents.
A bond is a contract with three participating parties: a principal, a surety and an obligee.
- Principal: The principal is a company or individual whose promise to perform is backed up by a bond.
- Surety: The bonding company that agrees to pay when a bonded event takes place is called the surety, instead of insurance company.
- Obligee: The obligee receives the benefit if something goes wrong.
There are many types of bonds, but they all fall within two categories: fidelity and surety.
Businesses and financial institutions purchase fidelity bonds to guarantee the honesty of employees. Bankers, accountants, stockbrokers, business office personnel and other employees with the access that could allow them to steal, embezzle or commit other crimes should be covered by fidelity bonds.
The Employee Retirement Income Security Act of 1974 (ERISA) requires retirement plans to purchase fidelity bonds. Fidelity bonds guarantee the conduct of plan administrators, trustees, fiduciaries or anyone who has contact with plan assets, cash or financial instruments.
A fidelity bond can also guarantee the honesty of service providers, such as carpet cleaners, maid services and home repairmen. As employee behavior is impossible to predict, a bond financially backs the business owner's promise that his employees won’t steal personal belongings, valuables or cash while on a customer’s premises. If an employee does commit a crime while on the job, the bond can pay.
When a company or person makes a promise to perform certain duties or obligations, a surety bond backs up that promise. The Small Business Administration website discusses how some businesses and government entities require bid bonds to guarantee that a company will do a job if they win the bidding process. After winning a competitive bid, a surety bond can guarantee the company's performance based on contractual guidelines and time frames.
State and local governments require surety bonds to guarantee that a business will pay their tax obligations. A Financial Responsibility bond is a type of surety bond that guarantees to the state that a driver has at least the minimum limits of liability coverage in force.
Bonds can be complicated, but your independent agent can answer any questions you may have.
We’re happy to assist you. Call Red Gorman Insurance at (214) 374-9997 for more information on Dallas surety bonds.