Commercial Bonds: What You Should Know

The concept of commercial bonds is often met with confusion, even by businesses that may otherwise value the protection they offer. Bonds take many forms, but in general serve as a type of contract — a guarantee that business agreements will be met according to certain terms or financial restitution will be made by one of the parties.

In this guide, we’ll go over the major types of bonds, cover common terms, and introduce information on how bonds can protect business interests.

Bond Types

There are many different types of bonds, many tailored to a specific industry they may be used in. Before listing several of the most commonly-found bonds, it is important to understand terms found in any discussion of these guarantees. The basic contract of a bond always contains three parties:

  • The principal, which is the business, organization, or individual purchasing the bond.
  • The obligee, which is the business, organization, agency, or individual that requires the bond before doing work.
  • The surety, or the underwriter of the commercial bond.

As mentioned, there are bonds for a broad range of industries and purposes. Here are some of the most common bonds likely to be found in a business environment:

  • Payment bonds – these are designed to cover payment of a contractor’s obligation under a work contract for subcontractors, such as service specialists (plumbers, electricians, framers, etc.), laborers, materials suppliers, or others associated with a given project. This type of bond may be the only such financial protection available to laborers and suppliers working public jobs.
  • Surety bonds – perhaps the most common, this type of bond protects an obligee against financial losses if agreements are not met according to specific terms and conditions.
  • Maintenance bonds – these bonds provide for routine maintenance and upkeep of a given project for a specified period of time after the project reaches completion. These bonds are designed to serve as protection against aspects like defective materials, defective workmanship, or incorrect/negligent building practices.
  • Performance bonds – these are tied directly to the work performance of a contractor, and protects the project owner from financial loss arising from failure to perform according to the terms and conditions of a work contract.
  • Contract bonds – sometimes called construction bonds, these bonds are commonly used in the building and construction industry. They offer financial security and compensation by giving assurance to the project owner (obligee) that the principal (the contractor) will both perform the work specified in the work contract and will pay subcontractors, laborers, and materials suppliers accordingly.

Bonds also help to ensure honesty on the business side of the equation. Surety bonds, among other types, compel the business or organization purchasing the bond to comply with all applicable local, state, and federal regulations governing the business. Finally, they may be required to secure a business license. If a given industry requires licensing, chances are that bonding will also be required.

Qualified insurance companies have the experience and the agents needed for businesses to make smart decisions. Call your insurance agent today to learn more about commercial bonds, whether they are required for your specific business needs, and how these valuable contracts can protect your business and financial interests.

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