When are Surety Bonds Required?

Surety bonds are useful but confusing, as there are many different types that each serve a different purpose. Some surety bonds may be required, but this depends both on the type of bond and the parties involved.

In general, surety bonds are three-way agreements between the surety (the agency that provides the bond), the obligee (the person or entity that requires the bond) and the primary (the party that needs the bond). A surety bond guarantees that the surety will provide compensation to the obligee in case the primary is unable to fulfill the contract. For example, say a government entity hires a contracting business to build a bridge. They require the business to enter a surety bond. If the contractors are, for some reason, unable to complete the bridge, the surety will compensate the government entity for the money and resources lost in the project. This doesn’t let the obligee off the hook, however. After paying compensation, the surety can turn to the contractors for payment since they had to compensate the obligee.

Surety bonds are often required in:

Obtaining a License

Those seeking certain licenses must purchase a surety bond, also known as a Common License or Permit Bond. This includes motor vehicle dealer bonds, contractor license bonds, collection bond, private investigator bonds and mortgage bonds. For example, if you wish to open a business that sells motorcycles, you will likely have to obtain a motor vehicle dealer license through a motor vehicle dealer bond.

Performing Construction

As stated before in the example, contractors are often required to enter surety bonds by the business or entity that they wish to work for. The example above is of a performance bond, where the surety would pay the obligee in case the contractor could not perform the promised work. The other two common contract bonds are payment bonds and bid bonds.

Bid bonds cover projects that are bid upon. If a contractor wins a bid for a project, they must enter a bid bond that promises they will complete the project as specified in the contract that went to bid.

Payment bonds guarantee that contractors subcontractors and suppliers will be paid for their work.

Attending Court

Persons involved in court proceedings may be required by law to enter a court surety bond. These bonds are generally designed to cover the court from financial loss due to court proceedings.

Court cost bonds promise that the court attendee will pay any court expenses required.

Indemnity to sheriff bonds allows law enforcement officers to receive compensation for damages or loss that occur during or after seizing a property.

Replevin bonds only apply to certain lawsuits that center around property and possession. This type of bond slows a plaintiff to retrieve property before the court case begins while simultaneously protecting the defendant from loss. For example, say a couple has divorced. Person A (the plaintiff) moved out but left behind the shared pet dog. Person A files for a replevin bond and is able to take back the dog before the trial begins. If the trial rules in favor of Person A, they can keep the dog. On the other hand, if the court rules in favor of Person B (the defendant), the replevin bond guarantees that Person A will return the dog and will be held responsible for any applicable court fees and expenses.

Bonds concerning legal courts are considered high risk and can be expensive due to the expensive nature of the legal system. Any legal surety bond requirements should be expressed before a trial begins.

ALSO READ: What is a Texas Performance Bond?