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What Exactly are Surety Bonds?

By Brown Ezilon.com Articles Published 07/2/2011 | Bond Insurance

Surety bonds are neither loans nor insurance policies, however they are considered as a form similar to insurance.  The difference between surety bonds and insurance is that this bond does not protect a business but it actually protects the obligee.

When you are insured you have the advantage of deductibles, with bonds there are no deductibles. With an insurance policy when you have a claim you will pay the deductible and the rest is covered by the insurance company. With surety bonds should you have a claim you are obliged to pay the claim back.

The obligee is the party that requires the bond and the bond is written to preserve the obligee should there be a claim. Many wonder why they should get a bond if they are not offered protection, and this is a good point. Unfortunately you do not have much choice, as the State will not grant you a license if you are not bonded. This is because if you have bonds, consumers are protected and feel more secure. However, if you are dealing with a licensed company you have a higher chance to recuperate your loss.

Although you are not offered a protection with bonds they do cover a variety of issues. These bonds can be used to guarantee certain payments, fraud, taxes, breach of contract and any other issue specified on the bond form. Every state has their own bond form drafted, on which State statutes and laws are drafted.

Most surety bonds have an aggregate limit known as a cap.  The surety bond will only payout on what the aggregate limit is and no more than this limit. This means that if you have a bond that is set at 50,000 and you have 60,000 in claims the surety will only pay out on 50,000.

Nowadays many states are restoring surety bond forms and are also increasing the bonding amounts. This is good news for the obligee, but it could stall the economic growth. It seems arguable that in current times it would be best to avoid actions that can make it more difficult to create jobs. Unfortunately the state does not have much choice due to the increase in fraud that needs to be stemmed, and this seems to be the only fast solution.

Surety bonds offer different options but are usually required to obtain a specified license. In fact there are so many that it can be confusing at times and a difficult choice to make.