Surety
What is a Surety Bond?
A surety bond is a three-party contractual agreement that guarantees a business or individual will meet their obligations under a contract and comply with relevant business regulations.
If the principal fails to fulfill their obligations to the obligee, the surety may be required to resolve the issue by paying a claim to the obligee. In this way, a surety bond functions similarly to a form of credit extended to the principal by the surety.
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Community Associations
Parties involved in the surety bond agreement.
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Homeowner Associations (HOAs)
Parties involved in the surety bond agreement.
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Master Community Associations.
Parties involved in the surety bond agreement.
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Condominium Owners Associations (COAs)
Parties involved in the surety bond agreement.
What happens if a claim is paid by the surety?
As a bonded principal, it is crucial to take all necessary actions to avoid claims. While claim activity can occur during business operations, whether valid or invalid, it is ultimately the principal’s responsibility to resolve any disputes before the surety is required to pay out on a claim.
Before becoming bonded, you will need to sign an indemnity agreement with the surety company, agreeing to reimburse them if they are required to pay a claim due to a violation by your company. Since the surety is essentially extending credit, they will expect reimbursement if a valid claim is paid. A paid surety claim can make it very challenging to obtain bonding in the future, as it is a standard question on all bond applications and is often a reason for declination.
How Surety Bonds Work?
To get bonded, you need to pay only a small percentage of the bond amount, which is called a bond premium. This percentage is different for every applicant and it is based on different factors, such as the type of bond you need, your credit score, financial statements and more.
? Auto Dealer Bonds
A popular example from the license bonds category is that of auto dealer bonds. These bonds are required in virtually every state before a dealership can get licensed and be allowed to legally operate in the state.
? Contractor Performance Bonds
Performance bonds protect the owner if a contractor doesn’t complete their work as specified in their contract.
? Contractor Payment Bonds
Payment bonds protect subcontractors, vendors, and suppliers if a contractor doesn’t pay them what was promised in the contract.
? Utility Deposit Bonds
A utility bond is a type of financial guarantee ensuring a person or organization will pay for utilities on time. Most utility companies require customers who are projected to use a large volume of utilities to be bonded before utility services are turned on. Unlike many other surety bonds that exist to protect consumers, utility bonds serve to protect utility companies by ensuring that the company receives payment.
? Tenant Lease Payment Bond (Cash Bond)
The lease payment bond or lease deposit bond is purchased by the tenant (principal) from the surety for the benefit of the landlord or real estate investor (the Obligee). The lease payment bond or lease deposit bond mitigates the risk to the landlord when each tenant is required to provide a surety bond that guarantees the faithful performance of the terms of the lease. If the tenant breaches the terms of the lease, and is placed in contractual default, the landlord can seek payment from the surety for the ongoing lease payments or damages pursuant to the terms of the agreement.
Lease Payment Bonds and Lease Deposit bonds guarantee multi-year commercial rent payments as stipulated in the lease. The bond may be purchased in one year renewable or prepaid non-cancellable multi-year periods.
? Condominium Escrow Deposit Bonds
Condominium Escrow Deposit Bonds (CEDB) can provide a developer with a low-interest source of working capital for their project. The bonds enable a developer to leverage the deposits which have been collected on pre-sold units before the construction has either commenced or before the construction has been completed.
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