Surety Bond Definition

Surety Bond Definition

The definition of a surety bond is a promise by a surety company to pay another party if a second party does not live up to its obligations set forth by the entity requiring the surety bond. To put it more simply; a surety bond is a promise to pay if something goes wrong.

Who needs a surety bond?

Many different types of companies need surety bonds. Motor vehicle dealers in Florida, Texas, Georgia, and other states need surety bonds which protect their customers. Cleaning services, home health care companies, and similar businesses need surety bonds which protect their clients from theft. Construction companies need surety bonds for licensing, to ensure compliance of various municipal codes, and to guarantee performance and payment on larger construction projects.

What does a surety bond do?

A surety bond protects your clients which are often referred to as an obligee. An obligee can vary from state licensing departments to various municipalities to individuals. It’s important to understand that only the obligee(s) can benefit from a surety bond as it’s a common mistake that a surety bond offers protection to you or your company. This is not the case as a surety bond is meant to provide protection to your clients in a worst-case scenario where you or your company cannot reimburse them when a valid claim occurs. For example: Let’s say you purchase a $10,000 Business Service Bond for your home health care or other business which involves your employees entering someone’s home or place of business. One of your employees steals a $9,000 ring from one of your clients and is convicted of the theft in a court of law. Your client then makes a claim on your Business Service Bond for the $9,000 ring and the surety company considers the claim to be valid according to the terms and conditions of the surety bond. However, you cannot afford to reimburse the client for the $9,000 ring. The surety bond would then provide the funds to reimburse your client not to exceed the $10,000 Business Service Bond amount.

So what happens next?

When you completed your application you most likely signed what is called a general agreement of indemnity or general indemnity agreement (GIA). This agreement outlines the rights of the particular surety company who wrote your bond. Simply put, the GIA allows the surety company to seek reimbursement for any claims paid and their associated costs from any entity and individual who signed the indemnity agreement. In some cases this process could include written demands for reimbursement, the seizure and sale of business and personal assets, and many other methods which would allow the surety company to be made whole for the costs they incurred. *IMPORTANT – All indemnity agreements are different. None of the statements above should be considered binding on any surety companies represented by DBL Surety, LLC. Read your indemnity agreement carefully to better understand your obligations.