This is a guest post by Kevin Kaiser of SuretyBonds.com, a nationwide surety bond provider. The agency’s Surety Bond Education Program reaches out to professionals in a number of industries who have an invested interest in surety bonds.
When it comes to purchasing or investing in some sort of bond, consumers usually begin their search for the most competitive rates by contacting their most trusted banking professional. However, traditional banks will probably be of little help for those looking to buy a type of bond known as a surety bond. Banking professionals questioned about surety bonds would likely direct the interested individual to an insurance company or a specialty surety agency, as surety bonds are a kind of protective investment that banks typically don’t provide.
In the past, some banks did offer surety bond services. However, due to current business models and ever-evolving surety bond regulations, today’s banks no longer offer surety bond services for a number of reasons. Surety bonds essentially function as legally binding contracts that ensure a certain level of performance. Thus, American banks currently avoid offering surety bonds due to the potential risks. Fortunately this allows consumers to protect their lines of credit with banks because their surety bonds are associated with insurance companies rather than banks.
A basic surety bond definition explains that each bond issued acts as an agreement among three parties.
- The principal is a professional or business entity that performs a service and needs to purchase a bond to guarantee the quality of future work.
- The obligee receives the service performed by the principal and is protected by the bond’s financial security. When professionals apply for a business license, the obligee is usually a state agency like the department of banking or finance.
- The surety issues the bond as a neutral third party to ensure that all work done by the principal will be completed according to industry regulations. Principals can apply to get a bond from a variety of different surety bond companies that oftentimes offer online approval within 24 hours.
If a principal fails to follow the bond’s stipulations, then the obligee can make a claim on the bond to collect reparation. Sureties are ultimately responsible for either resolving the situation or paying compensation, but they often work to make sure the principal will pay.
What Surety Bonds Are Not
Surety bonds are not bank guarantees. While banks issue their guarantees on demand, surety bonds are conditional and are only executed at the discretion of the surety provider. However, a parallel can be drawn when it comes to accountability. Banks are financially accountable for their bank guarantees, and surety providers are likewise financially accountable for the bonds they choose to issue.
Though similar in nature, surety bonds are also comparatively different from fidelity bonds. Whereas surety bonds protect a third party that is typically a government agency or the general public, fidelity bonds protect a specific employer or business from corrupt or dishonest employees who might mishandle company funds. Many fidelity bonds include a conviction clause that requires a conviction against the offender to be carried out before a claim can be made on the bond.
Banking Professionals Who Utilize Bonds
When banking professionals work with certain industries, they themselves must get bonded to guarantee the services they will provide to consumers. Notaries, insurance brokers, mortgage specialists and other real estate professionals typically have hefty surety bond requirements to fulfill in order to operate legally within their respective industries.
Knowing that a banking professional is bonded can be greatly reassuring to a bank’s clients for a number of reasons. To qualify for a surety bond, banking professionals almost always have to have good credit, a strong net worth and a reputable work record. Surety bond underwriters consider the same components as do banking professionals. In order to minimize their risks, they only issue bonds to trustworthy applicants. If a banking professional cannot secure the necessary surety bond(s), then his or her position will be jeopardized.
