Bonds: Insurance or Surety Shades of Grey?
Although provided by insurance companies, surety bonds aren’t insurance. Typically, they’re a grey area to most companies outside of the construction world. So what are they? Surety bonds are three-party agreements that include the principal (company or individual required to post the bond), the surety (insurance company) and the obligee (federal, state, municipality or private entity requiring the bond). Unlike insurance, with surety bonds ideally there’s no real risk transfer. They should be viewed as an extension of credit, more akin to a bank line. Commercial surety bonds simply facilitate commerce by guaranteeing an underlying service contract and to protect consumers, taxpayers and businesses.
Types of Surety Bonds
Commercial surety can typically be divided into five categories:
1. License & Permit (required by law to protect public interest and licensee to follow regulations
- Compliance – complies with ordinances
- Indemnity/Good Faith Guarantee – protects public safety and public against loss of money
- Court Bonds – appeal bonds, stay of execution, attachment, replevin, cost, injunction (for both plaintiffs and/or defendants)
- Fiduciary – bonds given to protect from loss that a fiduciary may cause by improper acts, (e.g. administrators, executors, guardians, receivers, trustees); bonds filed in probate courts, equity courts, federal court for bankruptcy filings
3. Miscellaneous – bonds that don’t fit neatly into any other major category
- Welfare Fund – required of employers, guarantees that monies will be paid union funds or that wages will be paid
- Utility – required of companies for deposits to a utility company – guarantee payment of gas, electric, water etc.
- Lost Instrument – required by a transfer agency should an original lost document be found that it will be returned to the obligee
- Self-Insured Workers’ Compensation – required of companies that choose to self-insure their workers’ compensation obligations – only written for the strongest financial profile companies
- Financial Guarantee – guarantees to pay a sum of money in the event the principal defaults on an underlying service contract; also a generic term for bonds that do not fall into a specific category, i.e. lease bonds
4. Public Official – required by law and guarantee a public officials faithful performance of duties
- Statutory – tax collector, school treasurers, treasurer for village, city, municipality, etc.
- Common Law – typically a voluntary bond such as a deputies bond
- Customs Bonds – guarantee that duty and taxes will be paid on items being imported and exported; importer/exporter of merchandise with foreign trade
- Carrier – companies that transport the merchandise to and from ports of entry
- Warehouse – the company that stores merchandise until the duty has been paid
- Excise Bonds – ensures the government gets the collected tax revenue due; guarantee that manufacturers, distillers, processors, brewers, wine maker and dealers will comply with the law and pay all taxes, fines or other charges due to the government
Commercial surety bonds are a better use of a company’s capital (in lieu of a cash deposit or letter of credit) and considered an off-balance sheet item. What’s not to like about that? If you have additional questions, chat with an ‘A’ Team member today.
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