When individuals and companies delve into the world of bonds, there’s often an assumption that everyone knows the ins and outs of standard bond terms. Unfortunately, that’s far from the truth. Bond-related terminology can be a bit of a mystery for many, so we’re here to demystify these terms and provide you with a clearer understanding when you’re dealing with bonds.
Deciphering Bond Terms
Obligee
The Obligee is the entity that requires the Principal to secure a bond. If the Principal doesn’t hold up their end of the deal, the Obligee is safeguarded by the Surety.
Principal
The Principal can be an individual or business mandated by the Obligee to obtain a bond. They are responsible for adhering to laws, rules, contracts, or regulations, and the bond ensures compliance.
Surety
The Surety, as the insurance company tasked with bond issuance on behalf of the Principal, assumes the responsibility of ensuring the fulfillment of the Principal’s obligations.
Indemnify
To indemnify means to make amends or compensate for a loss. The surety company has the right to be indemnified by the Principal in case of a loss, ensuring that the Surety is reimbursed for any incurred losses and expenses.
Surety Bond
A Surety Bond is a unique form of insurance where one party pays for it, but another party benefits. The surety company (third party) guarantees the successful performance of the Principal (first party) to the Obligee (second party) by a contract, statute, or regulations.
Contract Bonds
Contract Bonds become necessary when an individual or company is under a contractual obligation to deliver services or carry out work for another entity. These bonds serve as guarantees that the contractual terms will be met, and they encompass a range of types such as Performance and Payment Bonds, Bid Bonds, Subdivision/Site Improvement Bonds, Warranty Bonds, and Supply Bonds.
Court Bond
A Court Bond guarantees that an individual or organization will fulfill their court-ordered responsibilities. There are two main types – Fiduciary and Judicial Bonds.
Fiduciary Bond
This type of bond functions as insurance, protecting beneficiaries, heirs, and creditors if a fiduciary (trustee or someone acting on behalf of another) fails to act honestly or competently.
Judicial Bond
Judicial Bonds secure court costs in civil court proceedings when a party in a lawsuit seeks special rights or remedies before a final court decision.
Fidelity Bond
These bonds indemnify employers against financial losses caused by employee dishonesty or protect businesses from specific damage caused by employees. Categories include Employee Dishonesty, Business Service, and Commercial Crime Bonds.
License and Permit Bond
These bonds cover a wide range of requirements imposed by government agencies for regulated professions. They offer indemnification for losses resulting from a license or permit holder’s compliance with laws, ordinances, or regulations.
Bonds can become necessary in the business world, and understanding the terminology and jargon associated with them can be immensely helpful for individuals and companies alike.
