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What are surety bonds?
When a contract makes one party substantially dependent upon the other, the dependent party might want reassurance that they’ll be alright even if the other party fails in their obligations. In some situations, Texas businesses seek such assurance through surety bonds.
Sometimes failing to meet contractual obligations results in substantial financial costs for the party. Surety bonds may provide the other party with compensation should obligations not be met.
What types of Texas businesses purchase surety bonds?
Surety bonds can provide financial reassurance in many different situations. They’re often purchased by contractors, auto dealers, custodians and fiduciaries in Texas, among others.
The specific type of surety bond purchased depends on the party purchasing it and their situation, but there are options available for many different businesses and individuals.
What types of bonds do contractors purchase?
Bonds are often used in the construction industry when contractors sign on to complete a major project. In these situations, the bonds might provide the customer paying for the project with financial compensation if the contractor fails to complete construction.
A contractor might purchase different types of bonds throughout the various phases of a construction project:
Possible Coverages Available
- Bid Bond: May guarantee that a contractor will commit to a project if their bid is chosen and accepted.
- Performance Bond: May guarantee that a contractor will complete the project according to the project’s contract.
- Payment Bond: May guarantee that a contractor will pay their workers the wages promised.
- Maintenance Bond: May guarantee that a contractor will remedy defects found after completion.
While not all contractors get these various bonds, many larger projects require that any contractors bidding on or contracted for the work purchase an appropriate bond.
Bid Bond
Performance Bond
Payment Bond
Maintenance Bond
What types of bonds do auto dealers purchase?
Texas state law generally requires auto dealers to carry a surety bond of at least $50,000. This broadly applies to most new, used, franchised, independent, wholesale and other auto dealers. It also generally applies to motorcycle, house trailer, trailer and semi-trailer dealers, and some others.
The purpose of an auto dealer’s surety bond is to help protect customers against fraud, which is rare but has high costs given the prices of vehicles.
An insurance agent who specializes in bonds can help auto dealers, as well as other parties, procure the bond that’s right for them.
What types of bonds do individuals purchase?
Individual residents normally purchase bonds only if they have a legal obligation to another party, and most often the obligation is related to properly managing the other’s finances. These bonds are often called probate bonds, and there are different types:
- Executor Bond: Might guarantee the proper management of a deceased’s estate if they had a will.
- Administrator Bond: Might guarantee the proper management of a deceased’s estate if they didn’t have a will.
- Guardianship Bond: Might guarantee the proper management of an estate belonging to a legally incompetent adult or a minor.
- Conservatorship Bonds: Might guarantee the proper management of an estate belonging to a ward.
Again, a knowledgeable insurance agent can assist with these and other bonds if any are needed.
Who’s a party to a surety bond?
These bonds typically have three parties involved. The official terms for the various parties are:
- Surety: Party providing financial compensation (e.g. insurance company).
- Obligor: Party with an obligation to meet (e.g. auto dealer, fiduciary, contractor).
- Obligee: Party that something is done for (e.g. estate owner, customer).
The surety usually pays the obligee should the obligor fails to uphold their contracted responsibilities.
How can businesses and individuals get surety bonds?
While surety bonds are different than insurance policies, they’re commonly offered by insurance companies. For assistance with bonds, contact the independent Texas insurance agents at McKnight Insurance. Ready to secure your bond? Click here!
McKnight Insurance Services Independent Agency in Mansfield Texas
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