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Mar 16

Surety Bond: What Is It and When Do You Need One?

Reading Time: 5 mins

A surety bond is a kind of insurance that ensures a company will fulfill its commitments when contracted to do work. 

 

Louisiana is unlike any other state in the United States because of its unusual blend of French and Creole culture, magnificent architecture, and long history. As a result, Louisiana provides significant chances for development contractors and builders, ranging from repair work in New Orleans to new buildings in emerging locations such as Maurice. 

Developments require construction. Construction, on the other hand, involves risks. As a result, governments at the federal, state, and municipal levels use surety bonds to manage risk on building projects and safeguard public funds. 

What Is a Surety Bond? 

As per New Orleans, Louisiana laws, surety bonds are defined as a three-party agreement between an obligee, the principal, and a surety company. A surety bond is an assurance from a third party that the firm will adhere to its responsibilities. If the company does not comply, the third party will compensate the customer or government agency for any losses or failures from the company. 

  • Obligee: The party seeking assurance that tasks will be completed under specified conditions. 
  • Principal: The company hired to execute work under the bond’s provisions. 
  • Surety: The entity that issues the bond and guarantees the principal’s compliance with its obligations. If the principal fails to meet agreements, the surety is financially liable to the obligee. 

 

How Does It Work?

Surety bonds enable principals, often small firms, to compete for business against bigger, more established competitors. The principal pays a premium to the surety (an insurance firm) for issuing the bond.  

The surety undertakes to guarantee firms that satisfy its underwriting standards, including the business’s credit profile, ability to fulfill project commitments, and character or reputation. Once a surety agrees to guarantee a firm, the association can extend for many years and span several subsequent projects. 

The surety extends credit to the principal. Suppose the principal fails to perform its obligations and the surety is forced to pay a claim to the obligee. In that case, the principal has to repay the surety. 

 

What Is an International Surety Bond?

An international surety bond is an assurance that a business will adhere to a contractual or regulatory duty in a country other than the one the business is based. An international surety bond is similar to a surety bond documented in the United States.  

However, there are a few differences because each country has its own laws and markets for surety bonds. As a result, international contracts often need numerous forms of surety bonds. It highlights the importance of partnering with an experienced international surety bond provider with comprehensive expertise to issue multiple types of bonds.  

International surety requirements might offer difficulties for US-based enterprises engaged globally or considering expanding outside the US. In that case, professional help is recommended. Several professional firms like International Sureties are available in New Orleans, Louisiana, who has the experience and expertise to handle issues and specialize in international surety bond facilities. 

 

How Does It Work? 

Although their titles may differ, international surety bonds have the same three parties. For example, assume the guarantee applicant fails to perform the task specified in the international surety bond contract. In such instances, the guarantee beneficiary is entitled to receive payment following the terms of the bond and contract, often up to but not surpassing the bond’s face value. The applicant for the guarantee would then be compelled to repay the surety of the stated sum. 

Unlike LOCs (letters of credit), which are unconditional and can be claimed for any reason or no reason at all, many foreign surety bonds are conditional. Thus, even if a business feels it has met its promised responsibilities, there can still be a disagreement. In this instance, the guaranteed recipient would have a stronger bargaining position against the guarantee application. 

 

Types of Surety Bonds

Surety bonds come in a plethora of varieties. And since many states have their standards, there are hundreds or thousands of distinct types of bonds. Keeping track of all the information might seem to be a mammoth task. Fortunately, almost all surety bonds fall into one of four distinct types.  

Commercial Bonds 

Commercial bonds are required for many firms and professions before the state recognizes them as a legitimate corporate entity. Typically, before awarding someone a license, they must secure a business bond. States use commercial bond requirements to guarantee that professionals adhere to legal and ethical standards and suffer consequences if they do not. 

Contract Bonds

Contact bonds hold one party to a contract accountable if they fail to adhere to the conditions specified by the other party. While this bond is often needed for building projects, it can also be included in other contractual agreements. Contract bonds are one of the most prevalent forms of surety bonds. They allow the seamless execution of a contract and hold the erring party liable when things go wrong. 

Court Bonds 

Before starting legal proceedings, a judge can force someone to acquire a court bond. The court bond binds the bonded party financially if they fail to behave following the court’s directions. Court bonds are most often used in civil proceedings. 

Fidelity Bonds

Fidelity bonds safeguard a firm and its customers if an employee commits illegal conduct. Unlike commercial and judicial bonds, businesses are not obliged to get fidelity bonds. However, many see it as a smart method of risk management. Fidelity bonds also function as insurance policies to compensate the bonded party, in contrast to other surety bonds, which hold the bonded party financially accountable. 

 

When Do You Need a Surety Bond? 

Contractors seeking to work on high-value government projects are often required to post surety bonds. Even though surety bonds are not required, they make sense when a contract mandates performance. They assist obligees if principals breach contractual duties. Specific money lenders in the construction sector can demand the project’s bonding before funding. 

Large construction projects and financial ventures need a surety bond in New Orleans, Louisiana. This form of insurance coverage ensures that a building business will adhere to the contract’s conditions. Failure to do so may result in financial compensation. 

Requirements  

Louisiana law requires that any entity proposing a business opportunity, such as new development, get a surety bond of at least $50,000. Additionally, an independent contractor or broker for the company presenting the business opportunity must hold a surety bond for $25,000 or more.  

Suppose either the contractor or the subcontractor violates the contract, engages in unfair or deceptive activities, or engages in other dishonest behaviour. In that case, this bond will compensate for the financial damages. 

A company must submit a copy of the surety bond with the state before soliciting business or advertising services in New Orleans, Baton Rouge, or any other city in Louisiana. The contractor or subcontractor can terminate the bond by giving the state 60 days’ written notice. However, responsibility persists for the remainder of the 60-day term. 

Penalties 

The state can force a contractor or subcontractor to purchase a new bond if the existing insurance does not cover the firm’s legal liabilities. Failure to follow New Orleans’s surety bond requirements can constitute criminal prosecution. If found guilty of a violation, the responsible person faces up to six months in prison and a fine of $500. 

Construction-related surety bond issues can be complicated. Suppose you are a new company operating in Baton Rouge, Kenner, or New Orleans, Louisiana. An expert can assist you in the event of a third-party claim being made against your surety bond. If you and another party dispute legal liability, you have the right to legal counsel in court. 

 

Conclusion  

Insurance firms’ subsidiaries or divisions often underwrite surety bonds. Therefore, working with a surety bond provider with surety bond manufacturers may be advantageous. These qualified business experts have a thorough understanding of surety products. Best of luck! 

Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence. 

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