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What exactly is a Bond?
Bonds and insurance serve two different purposes, and respond very differently.
A bond in layman’s terms is a way to secure a debt or obligation.
It’s important to understand that bonds, and more specifically, Surety Bonds, are essentially a type of limited credit financial instrument.
There are three parties to this bond. The bond issuer or “Surety”, the bond purchaser who is referred to as “The Principal” for the benefit of the “Obligee” in the bonding contract.
You’re a contractor who holds a $30,000 license bond to maintain your Washington State contractor’s license. The purpose of your bond is ultimately to protect the public and your customers against your failure to uphold your end of a contract.
Lets look at some examples:
- You agree to a job worth $10,000 and collect a $5,000 deposit to get started. You completed 50% of the job and become sick and unable to complete the project. This leaves having to hire another contractor who charges $7,000 to finish the job. Your customer can file a claim for their financial loss, which would be the increased expense, or $2,000.
Because bonds are a type of credit, if a bond claim is paid on your behalf, you are obligated to repay the surety company for the amount paid out on the bond.
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- This is why your personal and/or business credit is used when pricing your bond.
- In an insurance policy, there is typically no requirement to repay the insurance company when a claim is paid; this is a key difference between a surety bond and an insurance policy.
Lilac insurance is able to help customer with all of their surety bond needs. We work with dozens of surety bond companies, can help you find an affordable bond, and help you get it to the party requesting it.
Call our office today or complete the form below to get started.
