Sunday, September 4, 2011

The 411 on Bonds

The name's Bond. James Bond. No, not that type of bond. We are talking about surety bonds. What is a surety bond?
A surety bond is a contract among at least three parties:
  • The obligee - the party who is the recipient of an obligation,
  • The principal - the primary party who will be performing the contractual obligation,
  • The surety - who assures the obligee that the principal can perform the task
A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly.

There are different types of surety bonds. Contract bonds are used in the construction industry, nd are a guarantee from a Surety to a project's owner (Obligee) that a general contractor (Principal)
will adhere to the provisions of a contract. Included in this category are:
bid bonds, performance bonds and maintenance bonds.

Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.

License and permit bonds are required by certain federal, state, or municipal governments as prerequisites to receiving a license or permit to engage in certain business activities.
Specific examples include:
  • Contractor’s license bonds, which assure that a contractor (such as a plumber, electrician, or general contractor) complies with local laws relating to his field.
  • Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import duties and taxes.
  • Tax bonds, which assure that a business owner will comply with laws relating to the remittance of sales or other taxes.
  • Reclamation and environmental protection bonds
  • Broker’s bonds, including Insurance, Mortgage, and Title Agency bonds
  • ERISA (Employee Retirement Income Security Act) bonds
  • Motor vehicle dealer bonds
  • Money transmitter bonds
  • Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.
 Court bonds are those bonds prescribed by statue and relate to the courts. Examples of judicial bonds include appeal bonds, supersedeas bonds, attachment bonds, replevin bonds, injunction bonds, Mechanic's lien bonds, and bail bonds. Examples of fiduciary bonds include administrator, guardian, and trustee bonds.

Public official bonds guarantee the honesty and faithful performance of those people who are elected or appointed to positions in government. Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, and law enforcement officers.

Miscellaneous bonds are those that do not fit well under the other commercial surety bond classifications. They often support private relationships and unique business needs. Examples of significant miscellaneous bonds include: lost securities bonds, hazardous waste removal bonds, credit enhancement financial guarantee bonds, self–insured workers compensation guarantee bonds, and wage and welfare/fringe benefit (Union) bonds.

Fidelity bonds, also known as employee dishonesty coverage, cover theft of an employer's property by its own employees. Though referred to as bonds, fidelity coverage functions as a traditional insurance policy rather than a surety bond.

The earliest known record of a contract of suretyship is a Mesopotamian tablet written around 2750 BC. There is evidence of Individual Surety Bonds in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, the ancient Hebrews and later England.

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