A bond is a legal contract that involves three parties: (1) The bonded party (the client seeking the bond), also called the Principal, (2) the obligee or the party that is requesting the bond from the client or the one who is the recipient of an obligation, and (3) the surety (insurance company), also called Obligor who assures the obligee that the principal can perform the task.
It is important to understand that the bond is not an insurance policy. Bond pays for damages due to not meeting conditions, lack of completion, a dishonest behavior, etc. Insurance pays for damages because of an accident.
A surety bond, for example, is a guarantee that the Principal in the bond, will perform the "obligations" as stated in the bond contract. For example, these obligations can be completing a project on a specific date, performing certain tasks according to village codes, etc. Once the Principal has met the conditions, the bond becomes "void". The language of the bond normally holds both the Principal and the Surety the responsibility to meet the terms of the bonds, jointly and severely - meaning that the Obligee could go after either party or both party in the event of not satisfying the terms of the bond.
There are hundreds types bonds. They include:
- Auto Dealer Bonds: A bond required by many states for new ventures in the used car dealership.
- Bid Bonds: Provide guarantees that certain individuals will sign the contracts when they are bidding and the bid is awarded to those people.
- Broker Bonds: A bond covering a wide range of brokers, like insurance brokers, mortgage brokers, real estate brokers, etc.
- Cigarette Tax Bonds: A bond required by the government from tobacco distributors, to make sure they will pay the taxes.
- Completion Bonds: A guarantee that a project will be completed on or before a specific date, regardless.
- Contractor License Bonds: Local and federal governments may request from certain contractors to have contractor bond, in order for the governmental body to grant license for the contractor to operate at a particular place.
- Customs Bonds. Required by the federal government (US Customs) from importers.
- DME Bonds: Bonds required by the federal government (Medicare) from the Distributor of Medical Equipments.
- Fidelity Bonds: Guarantee the lack of harmful or dishonest acts of certain individuals (employees, for example.)
- Freight Broker Bond (aka ICC Bond, or BMC-84): A bond that a federal government body (FMCSA) requires from all transportation/ freight brokers to operate - to guarantee delivery.
- Fuel Tax Bonds: A bond to guarantee payment of truckers of fuel taxes sold in a particular area.
- Jail Bonds: Guarantee that an individual will come back to jail/court on/ before a particular date.
- License and Permit Bonds: A category of bonds, not a type. This category includes contractors bonds, auto dealers, brokers, and other types.
- Liquor Tax Bonds: A bond to guarantee that the owner of a liquor establishment will pay liquor taxes to the government.
- Lottery Bonds: A bond that the establishments with state lotto machine are required to have to guarantee payments of lotto money to the state.
- Mortgage Banker/ Lender Bonds: Not the same as mortgage broker. This bond guarantees that the lending institution is going to stick to the state laws related to lending.
- Payment Bonds: Guarantee certain payments are made by a specific date.
- Payday Loan Bonds: Bonds that guarantees that payday lenders are operating per the state laws and rules.
- Title Agency Bonds: Required by many local governments to guarantee the title agents.
- Utility Bonds: Used to guarantees the payment of the utility bills in timely manner.
Cost of Bonds:
The cost of the bond depends on the amount of the bond, the credit of the Principal, and the type of the bond. For example a $10,000 contractor bond is less than a $50,000 similar bond. Some bonds require strict credit and financial underwriting. A $20,000 used car dealer bond could sell for less than $200 for someone with good credit, but may cost $1,500 (or even be not available) for someone with bad credit. Insurance companies also compete among each other, so a bond that costs $100 with a company may cost $50 with a different company.