When you hear the word bond, the first thing that comes to mind might be an investment. But the term "bond" also refers to a type of insurance policy that you can take out when entering into a contract with a client or another business. This type of bond is usually called a surety bond. It may be issued by an insurance agency or an agency that handles bonding.
When you enter into a surety bond, you and another party agree to abide by a certain contract. You pay into the bond, and if either you or the other party violates the contract, you can collect from the bond to cover the damages. Surety bonds protect you from underhanded clients, and they protect clients from your mistakes. Shopping for a surety bond can be a bit confusing, but understanding the following terms will make the process much easier.
Surety
When the term "surety" is used, it refers to the entity that issues the bond. So, if you purchase a bond through Bond Company A, then Bond Company A is the surety on the policy.
Bid Bond
A bid bond is a specific type of surety bond that is issued to contractors during the bidding process. Basically, the bond guarantees that the contractor will perform the work for the amount specified in the bid rather than turning around and charging a different amount when the work is done.
Damages
The term "damages" refers to any monetary loss that occurs when a bond contract is violated. For instance, if you are working on a client's house and make a mistake that results in $1,000 worth of water damage, then you've caused $1,000 in damages for which the client can collect through the bond contract.
Fidelity Bonds
This is a type of surety bond that business owners with employees can take out. It's a guarantee that your employees will be honest with you. If your employees act dishonestly and their actions cost you money, you can collect from the fidelity bond. Many collections from fidelity bonds are made after employees commit theft.
Indemnification
Indemnification refers to the act of paying when a loss is suffered. Here's an example sentence to illustrate this meaning: "The bond provided indemnification, ensuring that if the contractor damaged the bathroom, the bond company would pay for the damage."
Deductible
This is the amount that the holder of the bond would have to pay before the bond insurance kicks in and covers the damage. If you're a contractor with a bond policy with a $100 deductible and a customer files a claim for $1000 in damage, you would have to put $100 towards the damage -- and the bond company would cover the remaining $900.
Obligee
The obligee is the person to whom the bond ensures payment. If you are a contractor doing work on a client's home, the client is the obligee. If you cause damage while doing work, the obligee will be paid.
Premium
The premium is the amount of money you pay to take out a bond. Sometimes, you may pay this all at once, and other times, you may make premium payments monthly.
Principal
The principal is the person who is required to hold the bond to the obligee. If you're the contractor building something for the client, then you -- the contractor -- are the principal on the bond.
If you come across any other confusing terms when shopping for a surety loan, talk to a bond company like Service Insurance Company. They are used to explaining the bond process to customers and can ensure you know exactly what you are buying.