Understanding Surety Bonds: Protecting Businesses and Consumers

Surety bonds are integral to many businesses’ risk management and loss control measures. While these loss control measures may be complicated, companies cannot afford to ignore or take them for granted, as such investments can make all the difference in limiting financial and reputational losses when your business makes a mistake or fails to fulfill its goals. Such situations can have expensive consequences for other parties, such as clients and customers, making surety bonds essential.

What Are Surety Bonds?

In the insurance world, bonds refer to a valuable loss control measure rather than a way to potentially build future wealth. Insurance companies often sell surety bonds and can help secure your company’s financial interests, as well as other parties with whom it does business, such as clients, customers and the general public. While often providing similar financial security as traditional insurance policies, surety bonds are often purchased for a single job or contract rather than for ongoing coverage throughout a period of time.

How Do These Bonds Work?

Surety bonds may come in many forms, including commercial bonds, contract bonds, performance bonds, and license and permit bonds. Still, while there are many variants, these loss control tools typically function by establishing a legal agreement between the following three parties:

• The principal, such as your business, is responsible for purchasing bonds.
• The obligee, such as a client, determines if bonds are necessary to protect their interests.
• The surety, such as an insurance company, underwrites and maintains bonds purchased by the principal.

If the principal cannot complete the promised services, the surety bonds they’ve purchased can be used to compensate the obligee and limit their losses.

Why Are These Measures Important?

Even the most diligent and experienced companies may eventually encounter unforeseen hurdles that keep them from delivering optimal services. Such situations can quickly amount to significant financial losses, and subsequent lawsuits could inflict devastating reputational harm. However, surety bonds can help curb these consequences and allow all parties to recover with minimal repercussions. In many cases, prospects and clients may even require businesses to retain surety bonds before allowing them to bid on jobs.

We’re Here to Help

Contact Ayala Insurance Services in Phoenix, AZ, today to learn more about surety bonds and secure the right loss control measures.

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.