In their simplest terms, bonds are merely an agreement of one party to pay another party. You may have heard of bonds in a number of different contexts. For example in the financial sector US Treasury Bonds, Municipal Bonds, and Corporate Bonds offer an investment vehicle. They are purchased and then repaid, plus interest. In the legal sector a court bond refers to agreement to pay a certain amount if the person who is out on bond does not appear for his or her court date. Thus, in the professional world a bond likewise simply refers to an agreement to pay if a company fails to meet a certain type of obligation. This last group of bonds are often called surety bonds.
What Types Of Bonds Are Common In Business?
There are almost countless types of professional bonds out there across all different professions. However, one of the most common types of surety bonds involves the promise to pay for taxes. If a company is new, or if they simply have a high tax obligation then they may be required to get a surety bond for their taxes. Bonds to pay for utilities and other services are also very common. A contractor may need to get a bond for the work that they will be performing.
Who Is Involved In A Bond?
There are three parties involved in a bond agreement. The obligee, the principal, and the company backing the bond, often called the surety.
Obligee – The obligee is the person or entity who is requiring the bond. Thus in the case of taxes the obligee may be the government, for utilities it would be the utility company, and for a contractor performing a service of some kind it would be the party receiving the service.
Principal – The principal is the person or entity who is required to get bond. Thus if you are shopping for bonds for your company, then your company is the principal.
Surety – The surety or insurance company backing the bond is the entity who would pay the amount of the bond to the obligee if the principal fails to meet the obligations specified by the bond. Thus, the principal party pays the insurance company (surety) the premium in return for this backing of the bond.
What Determines How Much I Will Pay For My Bond?
As with most insurance premium costs, the amount you are charged will depend on the risk involved for insuring the bond. Thus one big factor involved would be how much the bond is for in the first place, because the higher the face value of the bond, the more risk involved, and therefore the higher the insurance premium to cover it. Another important factor is the perception of how likely you are to default on the bond and thus require the insurance company to pay it.
Bond requirements can be very confusing for businesses that is why here at Beaty Insurance we emphasize quality customer care and exemplary service. We are always happy to sit down with our clients and discuss their questions and concerns and help them determine the most appropriate bond policy for their business. Please contact us for more information.