What is a Surety Bond?

By Zuma Insurance Services | July 26, 2017

Reasons To Purchase A Surety Bond

In certain situations, such as when starting a large project or making a major purchase, people and organizations want a guarantee that the service or product provided will be as promised. Surety bonds are used to provide assurance with extra big purchases.

Surety Bonds Are Lines of Credit Offered by Insurers

Surety bonds are normally sold by insurance companies, but they’re more akin to lines of credit than traditional insurance policies.

Rather than providing a financial safeguard against catastrophes for a policy-holding business, surety bonds offer protection for the customers or organizations that a business has obligations to. Should a business fail to meet its minimum obligations, its surety bond will provide financial compensation to the injured party. This is the only purpose a surety bond’s line of credit can be used for.

Surety Bonds Offer Assurance for Major Projects and Purchases

While warranties may provide sufficient assurance for smaller purchases, surety bonds are used when extra assurance — or surety — is needed.

Warranties are frequently backed by the business that’s providing a service or product, which limits how useful they are. If a business isn’t able to honor warranty claims, whether for financial or other reasons, the warranty is effectively useless. This is especially problematic with large financial transactions, because a business could go bankrupt shortly after a transaction is made — and its warranty wouldn’t be honored by any company.

Surety bonds, in contrast, are backed by third-party insurance companies. Because of this, they’re much more trustworthy. Not only are they guaranteed by a third-party company, but insurers are both highly regulated and regularly rated according to their financial soundness. Insurance companies are less likely to go bankrupt than other businesses, so their guarantees are more trustworthy.

Therefore, insurers’ surety bonds are used for large projects are contracted and major purchases are made. They’re also used when a business could have a large financial obligation to another party, such as a tax obligation to the government. In these situations, a surety bond ensures that a business meets its financial obligation even though the obligation isn’t to a direct customer or client.

Some examples of businesses that may need different types of surety bonds include:

Car dealers, in case there’s a major issue with a purchased vehicle
Commercial construction firms, in case they’re unable to complete a building project on time
Medical supply companies, in case a product malfunction causes personal injury
Liquor stores, in case they’re unable to pay the sales tax they owe

Some of these businesses may be required by state law to have a surety bond in place. Others might not be legally required to have a bond, but they might have a hard time finding work or selling products if they don’t have a bond.

Surety Bonds Benefit Both Parties

Although the lines of credit provided by surety bonds go to the affected customer, client or other organization that’s owed financial compensation, they don’t just benefit this customer, client or organization. They also benefit the businesses that purchase these bonds — even though the purchasing businesses don’t receive compensation from the bonds.

By having a surety bond, a business can reduce the financial assets it needs to keep available in case there’s a problem with a project or product. Rather than having a stockpile of cash “just in case,” a business can use the bond as a just-in-case fund and devote its financial resources to actions that help the business grow.

A surety bond benefiting both parties

Finding Surety Bonds

In short, surety bonds are:

Lines of credit that provide insurers
Purchased by a variety of businesses
Beneficial to both parties involved in a transaction
Offered by insurance companies

If you need to purchase a surety bond Zuma Insurance is the right provider. We provide surety bonds and many other necessary business insurance services for business owners. For help finding a surety bond that meets your business’ needs, contact us at Zuma Insurance.