Surety Bonds Explained

I am pleased to have a guest post today by Kevin Kaiser of suretybonds.com. Please feel free to contact Kevin at: kevin@suretybonds.com

Surety Bonds Explained

While many people may not realize it, surety bonds of all descriptions are a critical component of business today in the United States. A wide variety of industries are required to carry surety bonds, and a variety of business types from construction companies to retirement communities are built upon surety bonds. But what are surety bonds and how do they work?

A surety bond is essentially an agreement between three parties: the principal (the party required to have the bond), the obligee (the party requiring the bond), and the surety bond company (the party who sells the bond). The bond represents an agreement between these three parties that the principal will adhere to the terms set forth in the bond (generally that they will perform their business practices ethically and in accordance with federal, state, and local laws) and that if they do not, a claim will be filed against the bond by the obligee in order to receive restitution for the wrongdoing. In the event of such a claim, the surety company pays the obligee damages and then requires reimbursement from the principal.

In most cases, surety bonds work synergistically with the business practices of most industries, and the bond is in place merely to ensure that the bonded company behaves ethically and according to the legal standards for its profession. However, there are occasional exceptions to this situation, and sometimes new business practices and surety bond regulations can clash, as is the case with green construction bonds.

Nearly every construction project undertaken in the US today requires a surety bond, which has been the case for nearly a century. As the construction industry has evolved to include greener, environmentally friendly methods of construction, the industry has found a conflict between the required performance bonds for these projects and the third-party certifications often necessary to qualify a project as green. Surety companies usually rely on a construction company’s financial health, work history, and expertise to issue a bond, but in the case of a green project, the responsibility for the project’s success no longer rests solely on the construction company in question, but instead partially on a third party’s approval. As a result, many surety companies will not bond a green construction project. Legislation is currently being constructed to accommodate this discrepancy between the reality of the construction industry and the requirements of the surety bond industry, but until the matter is resolved, many green building projects have had to take a necessary hiatus.