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Understanding Surety Bonds for Your Business

Does your business utilize surety bonds? These can be a vital tool for businesses that need to protect themselves from financial loss. They’re a good way to manage and transfer risk in certain situations, and they can help protect both private and public interests. The idea of surety bonds might seem complicated at first, but it’s actually a pretty simple process involving three parties.

1. The principal

The principal is the person, group, or party who buys the bond. The principal is the hired party, and the surety bond ensures the obligee will receive compensation if the principal doesn’t fulfill their obligations. This party must agree to terms of repayment, and this is often with interest.

2. The obligee

The obligee is the party that requires the principal to ensure a surety bond to protect themselves from financial loss. This is the party that hires the principal. By securing a surety bond, the obligee is guaranteed the services are performed or that they’ll receive financial compensation if not.

3. The surety

The surety is the financial institution or body that secures the funds for the bond and guarantees the principal will be able to fulfill a financial obligation. Consider the surety to be a lender for simplicity’s sake.

In the event of a claim, the surety bond company pays the obligee, and then the principal must pay the surety back via annual bond premium that between 1% – 15% of the total bonded amount until the obligation is complete. If a principal doesn’t meet their bonded obligation and a claim is filed against them, the surety covers the claim and recoups the money via indemnity.

While a variety of industries utilize surety bonds, they’re most common within the construction industry. Relating to construction, surety bonds are used to protect against disruptions or financial risk due to a contractor’s failure to complete a project or to meet contract specifications. These bonds ensure a construction project’s bills will get paid and are often required by investors.

To learn more about protecting your business (no matter the industry) from a variety of financial risks, give Fargo Moorhead Insurance a call today so we can help!

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