Bonds are a performance guarantee. They are a financial loss instrument paid for and held by the business entity delivering a service or product to a recipient. By posting a bond, the bond holder purchases the assurance of a third party, often referred to as a surety company, to his customer that they - the bond holder - are qualified and able to perform or deliver a stated service, product, or function.
There are many types of bonds that have evolved over the history of the insurance industry. Some of the most common bonds that can be placed by Prompt Insurance Agency include the following:
- License and Permit Bonds
- License and permit bonds are bonds which are required to obtain a license or a permit in any city, county, or state. These bonds guarantee whatever the underlying statute, state law, municipal ordinance, or regulation requires. They may be required for a number of reasons, for example the payment of certain taxes and fees and providing consumer protection as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.
- Contract Bonds
- Contract bonds guarantee the performance of obligations under a contract. These bonds guarantee the recipient that the principal will perform according to the terms of a written contract. The most common type of contract bond occurs in the construction industry - where the contractor is bonded to perform the project for a stated fee and sometimes, within a specified time limit. Contract bonds protect a project owner by guaranteeing a contractor's performance as well as payment for labor and materials. Because the contractor must meet the surety company's pre-qualification standards, construction lenders are also indirectly assured that the project will proceed in accordance with the terms of the contract.
- Bid Bonds
- A bid bond is somewhat like a contract bond. Bid Bonds guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bond. Bid Bonds are used by owners to pre-qualify contractors submitting proposals on contracts. These bonds provide financial assurance that the bid has been submitted in good faith and that the contractor will enter into a contract at the price bid. When applying for a bid bond, surety companies review the same characteristics in an applicant as a financial company does when issuing a loan. First, the Surety will conduct a review of the company's management performance so it will gain knowledge of the company's history, as well as determine whether the company is respected in the construction community. Next, the bond issuer, the Surety, will examine the qualifications and background experience of the contractor's personnel. Finally, The net worth of the contractor and shareholders will be determined through a review of the financial statements. This will help the bond company determine whether the contractor has the financial resources to complete the project.
- Fiduciary Bonds
- Fiduciary bonds guarantee an honest accounting and faithful performance of duties by administrators, guardians, trustees, executors, and other fiduciaries. Fiduciary bonds, in some cases referred to as probate bonds, are required by statutes, courts, or legal documents for the protection of those on whose behalf a fiduciary acts. They are needed under a variety of circumstances, including the administration of an estate and the management of affairs of a trust or a ward.
- Fidelity Bonds
- Similar to fiduciary bonds, fidelity bonds are meant to insure honesty. This bond guarantees the integrity of trusted parties such as employees or key service providers such as lawyers or a CPA. Fidelity bonds cover losses arising from employee dishonesty and indemnify the principal for losses caused by the dishonest actions of its employees.
- Bankruptcy Trustee Bonds
- Bankruptcy and Trustee bonds provide a guarantee to the beneficiaries of the bankruptcy action (usually the creditors and vendors) that the bonded trustees appointed in a bankruptcy proceeding will perform their duties and handle the affairs according to the rulings of the court.
- Common types of bankruptcies are:
- Chapter 7: calls for the "liquidation" of a business and allows for the sale of the assets to pay outstanding debts.
- Chapter 11: calls for the "reorganization" of a business and the debtor remains in possession of the assets after the filing of a plan for the reorganization.
- Maintenance Bonds
- Maintenance bonds insure the upkeep and continuation of a projects performance parameters for a specified period of time after the project has been completed and/or operations commenced. In addition to guarantees against defective workmanship and materials, these bonds may also include a guarantee of efficient and successful operation.
- Miscellaneous Bonds
- When a specialized, commonly packaged bond cannot be provided - the Surety may choose to write a miscellaneous bond. Essentially, this is a custom bond designed to fit the unique insurance and indemnification needs of the bond purchaser.
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