Commercial Surety Bond Overview

Before moving on to gathering a better understanding of commercial surety bonds, it is important to review what exactly a surety bond is, who the parties involved are, and what the bond does for those involved. A surety bond is an official document used to guarantee the performance of a third party entity. In the three party agreement, the bond is issued by the surety (company providing financial backing) in order to guarantee the performance of the principal for the obligee. The principal is the person or business bound by the surety bond to complete some sort of task per the terms of the obligee's contract, according to permit or law. Since the obligee is given the surety bond, they are protected against loss by the surety. If for some reason the principal defaults, or is otherwise violates the terms of the bond, the surety will be required to either pay the obligee as prescribed in the surety bond, or possibly step in to perform the obligation that was to be completed by the principal.

Over the past several years, the commercial surety bond market has grown substantially. While in the not so distant past, commercial bonds were often referred to as simply "non-contract surety bonds", today that is no longer the case due to the vast amount of commercial bond types, the frequency with which they are being written. Insurers throughout the country have been working to develop innovative, new products for commercial surety customers, which has increased competition and help further boost the market's growth.

While there are literally dozens of different types of commercial bonds available, for purposes of furthering understanding of this category of surety bonds we will break them down into four broad classes:

License and Permit Bonds

The majority of commercial surety bonds are considered "license and permit bonds". These types of surety bonds are those that are required by the government (federal, state or local) for a business to legally operate, or carry out a certain task of function. Basically, some government entity (obligee) is requiring an individual or business in a certain occupation or profession (principal) to obtain a license and/or permit, along with the respective license and permit bond, in order to conduct business in their state or municipality. Some laws outline the standard of conduct for the bonded principal, whereas others require permits to be posted prior to performing special functions relating to business.

With the wide variety of license and permit bonds required and made available for qualified applicants today, bond function and what exactly is being guaranteed will vary from bond to bond. Ultimately, the primary purpose of license and permit bonds is to provide protection to government entities and the general public from losses that may be incurred if the principal of one of these surety bonds falls short of fulfilling their obligations to the obligee.

Common examples of license and permit bonds are as follows: auto dealer bonds (also known as DMV bonds, or used car dealer bonds), freight broker bonds (BMC-84 Bond, ICC Bond), mortgage broker bonds, mortgage lender bonds, sales tax bonds, and telemarketing bonds.

Public Official Bonds

Individuals appointed, elected or hired to fulfill government functions are known as public officials. Prior to assuming their duties, federal, state, county and municipal laws may require these individuals to post a public official bond in order to guarantee the integrity and faithful performance of all official duties. Public official bonds ensure that all funds and property handled by an office are properly collected and accounted for. Furthermore, public officials can be held liable for the actions of their subordinates.

If a bonded public official does not perform up to their obligations, the surety will be required to pay damages to the obligee up to the bond penalty amount. The surety will then look to the public official (principal) to repay them. Additionally, the public official in question will be obligated to pay any damages in above the bond penalty.

Court Bonds

While some surety bond producers list court bonds separately from the rest of the commercial bond types, they technically fall under the same major surety bond category. For purposes of explaining what court bonds are we will break them down into three subcategories: judicial bonds, admiralty bonds, and fiduciary bonds.

Judicial bonds are common in civil lawsuits, enabling parties to pursue a remedy in court. In civil lawsuits, plaintiffs are always required to post a judicial bond, and at times a defendant may be required to do so. This type of court bond can protect one party if, for instance, the other party was granted a certain privilege by the court, but it is later determined that granting them that privilege was unwarranted. If the party granted the privilege during the duration of the lawsuit was given an unfair advantage resulting a loss to the other non-privileged party, the opposing party will be granted protection. In some cases, the opposing party that did not have the privilege may be authorized to post a counter bond, which could act to counteract any negative effect caused by the other party having the privilege.

Another subcategory for court bonds, known as admiralty bonds, pertains to legal maritime issues relating to the sea and waterways. Admiralty bonds are required by the federal government of maritime shipowners in order to guarantee that if the cargo or property of others is damaged, principal shipowners will pay for damages, etc.

Fiduciary bonds make up the remainder of court bonds. They are utilized for a wide range of purposes and consist of such court bonds as guardianship bonds, estate bonds, executor bonds and probate bonds. With these types of court bonds, the named principal (person or legal entity) has some sort of fiduciary duty to another person. A court appoints the fiduciary to control or manage or control the property of or care of others. Fiduciary bonds guarantee the faithful performance of duties by a principal, whether that be properly accounting for property received, etc.

Miscellaneous Bonds

The final class of commercial bond is reserved for bond types that have unique purposes and cannot be easily lumped into a broader subcategory. One example of a miscellaneous bond required by a government entity is an ARC Bonds, which is a commercial bond required by the Airline Reporting Commission to ensure that travel agents will forward all applicable payments to airlines. Some miscellaneous bonds, however, are not government mandated, but instead are requirements that come about due to private business relationships and transactions.

For a complete listing of all Commercial Surety Bonds, please click on the following link: Commercial Bond Listing.