A surety bond is a bond that ensures that the related party has fulfilled his obligation. These types of business contracts usually require three parties, which is not as ordinary as compared to the other contracts. It provides a guarantee to the owner regarding the completion of the project by the principal. The parties involved in a surety contract are known as surety, obligee, and principal. A surety bond is an essential business contract for all the contractors in the construction industry. Surety bonds are subdivided into three categories, these include commercial, contract, and fidelity bonds.
HOW DOES A SURETY BOND WORK?
The responsibility of getting a surety bond is of the principal. The bonded amount of surety is valued by the obligee. The surety company must have a sound financial balance sheet to compensate the obligee. This requirement is necessary because the surety cannot go behind the principal for compensating the obligee. Generally, in the event of any default, the obligee shall appeal a claim from the surety company. For more information, you can visit Alpha Surety Bonds.
SURETY BOND INDEMNITY
Guarantee plays a vital role in surety bonds as it is crucial to understand that the related parties might be asked to indemnify. The principal shall always be considered as an indemnitor on a surety bond. The common indemnitors recognized in the industry of construction are as follows,
1] CORPORATE SHAREHOLDERS: The shareholders of publicly interested companies are not included in this type of shareholders. This normally applies to a class of shareholders holding 15% or more.
2] SPOUSES: The spouse of each indemnitor shall be required to sign an indemnity agreement. This process is not affected by the principal being an individual or a corporation.
3] RELATED BUSINESSES: If the principal runs multiple businesses, the owners of such businesses may be asked to sign the contract as well.
CAN I GET A BOND WITH BAD CREDIT?
Yes, Surety bonds can be obtained even with a bad credit history. It requires the usage of specialty surety bonds. For example, an individual with great financial resources may obtain surety bonds easily. There might be changes in the cost of the premium of the bonds according to the credit history.
WHY ARE SURETY BONDS IMPORTANT?
Surety bonds are considered vital due to the nature of the contract. The contract protects the obligee in the event of any fraud or misbehavior by the principal. This contract promises to compensate the obligee for the damages caused by the principal. It also enables the principal to become accountable for the work performed.
CONCLUSION
Surety bonds are widely used in the construction industry. It provides a guarantee to the obligee regarding the completion of his project. Obtaining surety bonds may increase the confidence of the investors in such industries, as a result of overall growth in the economic sector.