How do bonds work? This is a vague question that can be referring to many unrelated bond types. However, if you’re looking for a guide on how surety bonds such as license and permit, contract and court bonds work, or are looking for an explanation of how fidelity bond insurance works, you have come to the right place.
What Are Surety Bonds, and How Do They Work?
Surety bonds are guarantees and provide protection for the public. They are usually required by the government, but can also be required by private third parties. There are many types of surety bonds that provide a wide range of guarantees, such as ensuring a construction job will be completed properly, or guaranteeing an auto dealer will abide by the law while selling motor vehicles. If you would like more information on what it means to be bonded, please read our article about being bonded with surety bonds.
How Do License and Permit Bonds Work?
Let’s begin with how license and permit bonds work. They guarantee the terms of a business license will be followed, and are required by local, state or federal governments to get a license or permit for many occupations. To demonstrate how license and permits bonds work, we will use the common real world example of an auto dealer bond.
An auto dealer who wants to get their license to sell motor vehicles will likely have to get an auto dealer bond since these bonds are required in most states. The auto dealer bond guarantees the dealer will follow the terms of their license, along with any other applicable laws and regulations of the state. If the auto dealer breaks the rules, such as knowingly selling a defective vehicle to a customer, a claim can be filed on the auto dealer’s bond by the customer. The claim will be investigated by the surety company, and if found to be legitimate, the customer will be reimbursed by that company. However, the surety will go back to the auto dealer to recoup the claim they paid out.
There are also miscellaneous bonds, which are sometimes thought of as license and permit bonds, but they aren’t related to getting a license or permit at all. Like all surety bonds, miscellaneous bonds provide a variety of guarantees. For example, some states require health clubs to get a health club bond, which guarantees that if the gym is to close, any prepaid membership fees will be refunded. If the health club doesn’t refund prepaid membership fees, the same surety bond claim process will take place as described above. The customer will file a claim, the surety company will pay the claim (if it’s a legitimate claim) and then the surety company will go back to the health club for reimbursement.
As you can see, surety bonds protect the public, not the bond holder. To learn more about license, permit and miscellaneous bonds, please visit our license and permit bond center.
How Do Contract Bonds Work?
Contract bonds guarantee the terms of a contract will be followed, and are most often used to guarantee public construction jobs will be completed correctly. In order for a contractor to be considered to work on public projects, the contractor is required to get bid and performance bonds. When a contractor decides they want to work a on a public job, such as building a city bridge, they must first bid on the job using a bid bond. The bid bond guarantees the bid submitted by the contractor is accurate and complete. If the contractor is the lowest bidder and awarded the project, the next step is to get a performance and payment bond.
Performance bonds guarantee work will be done according to the contract. Payments bonds are often joined together with performance bonds, and they guarantee that any laborers, suppliers and subcontractor will be paid. If the contractor performs faulty work, walks off the job or doesn’t pay subcontractors, a claim can be filed on the performance and payment bond. The surety company will investigate the claim, and if valid, will hire a new contractor to complete the project. The contractor who caused the claim isn’t off the hook because the surety company will go back to him for reimbursement.
Once again, surety bonds protect the public, not the person who is bonded. For more information on contract bonds, take a look at our contract bond center.
How Do Court Bonds Work?
Court bonds guarantee that an individual or organization will fulfill their duties as ordered by the court. These duties vary depending on the specific type of court bond. For example, guardianship bonds guarantee a legal guardian of a minor or disabled person will manage their finances according to court orders. If the court orders aren’t followed and finances are mismanaged, a potential heir can file a claim directly with the surety company, or the court can be notified and handle the claim. In either case, if the claim is found to be valid, the surety company would pay any losses, and then go to the guardian for reimbursement. To learn more about court bonds, please visit our court bond hub.
How Do Public Official Bonds Work?
Our last surety bond category is public official bonds. They are often lumped together with license, permit and miscellaneous bonds, but are actually their own category. Public official bonds guarantee elected public officials such as treasurers, judges, mayors and sheriffs to name a few, will perform their responsibilities honestly and according to local or state laws.
If laws are broken and the public official causes financial loss, the local or state government can file a claim on the public official bond. Like with the other surety bond types, the surety company will investigate the claim and if legitimate, will repay the county any losses experienced. The surety company will then go back to the public official who caused the claim for reimbursement. For more information on public official bonds, please visit our public official bond general information page.
What Is Fidelity Bond Insurance, and How Does It Work?
Fidelity bonds are very different from surety bonds. They are a form of insurance that protect against employee dishonesty such as theft, and usually aren’t required by anyone. For example, if an employee of a cleaning business steals a customer’s personal property and there is a business services fidelity bond in place, a claim can be filed on the bond, but only if the employee who allegedly stole from the customer is convicted by a court of law.
The same goes for employee dishonesty fidelity bonds, which protect the employer from dishonest acts by their own workers. Once convicted, the claim can be paid out by the surety company who wrote the bond to reimburse the losses. For more information, read our in-depth article about what it means to be bonded with fidelity bonds. For information on all fidelity bond types, visit our fidelity bond center.
There are drastic differences between surety and fidelity bonds and how they work. A surety bond is a guarantee that protects the public, while fidelity bonds are not a guarantee, but an insurance policy that protects consumers against employee dishonesty. If you have any other questions about the world of bonds, please leave a comment below; we’d be happy to hear from you.