Surety Bonds

What is a surety bond?

At the most basic level a surety bond is simply a guarantee.  What the bond is guaranteeing is determined by the specific type of bond and its language.

How does a surety bond work? Surety bond basics.

A surety bond is often mistaken for insurance, however, a surety bond differs from insurance because: the underwriting process is different, the contract is different, there are three parties involved rather than two.

In an insurance contract there are two parties involved. The insured and the insurer, or the purchaser of the policy and the insurance company. A bond differs because there are three parties: the principal (or purchaser of the bond), the obligee (the party demanding the bond), and the surety (the company selling the bond).

How does a surety bond work?

For example, Putnam County, NY may require all contractors to be bonded if they want a contractors license to provide services in that particular county. Therefore, a contractor (the principle) is required to purchase a bond from a bonding company (surety) to meet the requirements of the county (obligee).

In this example the bonding company is making a written gaurantee to Putnam County that the contractor will operate by the rule and regulations set forth in the license requirements. Should the contractor breach the regulations set forth by the county, Putnam County can place a claim against the bond.

In the event a claim is made against the bond, and the claim is paid out by the bonding company, the bonding company will seek reimbursement from the principal, in this case the contractor.

 What types of surety bonds are there?

There are many types of surety bonds however the most common are contract bonds, commercial bonds, and court bonds.

A contract bond gaurantees that a specific contract will be executed. The most typical bonds of this nature are bid bonds, and performance bonds.

A commercial bond is one that is required to fulfill some type of government regulations, whether it be state or local. These types of bonds are required to operate a specific type of business for example a liquor license would require a commercial bond. The example of a contractor given above also would require a commercial bond.

Court bonds are the third type of common bond. This bond gaurantees that the principle will follow the demands of the court.

 What are the bonding requirements in Putnam County, NY? Do I need a bond to get a contractor’s license?

Yes. If you fall under the category of a home improvement business as declared in Putnam County Law, then you are required to register with the county and maintain a predetermined level of bonding.

Please see this article if you are looking to start a business in Putnam County New York: bond requirements in Putnam County, New York