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What Is a Surety Bond?

Surety bonds play a significant role in so many industries across the country. However, the topic of surety bonds is not always the easiest to grasp, and many people are unaware of what a surety bond in El Paso, TX actually is or when they might need one.

To help clear up the confusion, it’s important to take surety bonds back to basics and determine their function. In essence, a surety bond is a way to transfer risk from one party to another.

Understanding surety bonds

Unlike traditional insurance, which is a contract between an insurance company and an individual or business, a surety bond is a mutual, legally-binding contract that promises that certain parties will uphold a particular set of obligations. There are three parties involved in a surety bond:

  • Principal: The principal is the entity that needs the bond.
  • Obligee: The obligee is the entity requiring the bond by the principal.
  • Surety: The surety is the insurance company ensuring that the principal can fulfill its obligations.

A surety bond is essentially an insurance policy that protects the obligee. Surety bonds financially guarantees to an obligee that the principal will uphold the terms of their bond agreement. For this reason, the principal is usually obligated to obtain and pay for the surety bond. This includes the principal paying a premium, which guarantees to the surety that the principal is able to reimburse it for any claims. Since losses are not expected in a bond agreement, only certain entities are qualified for surety bonds as a means of protection for all parties.

The surety bond company provides a line of credit in the event that the principal cannot fulfill their agreement. If the principal fails to comply with the bond’s terms, the obligee can make a claim for reparations for damages, which the surety will pay once the claim is assessed. Then, the principal will be required to reimburse the surety for any claims they paid on their behalf.

Who uses surety bonds?

Surety bonds are often required for businesses that provide services to consumers. They can also be useful in regulating riskier markets, like the mortgage industry. Surety bonds will typically fall under either a commercial bond or contract bond category. The construction industry uses surety bonds often, as well.

Not everyone will need a surety bond, though. Entities considering a surety bond should research the regulations for their industry within their specific state. Different states will have different rules when it comes to who needs a surety bond and who does not.

Turn to Pan American Insurance, Inc. for a surety bond in El Paso, TX

If your entity is in need of a surety bond, contact the experts at Pan American Insurance, Inc.! We are an independent insurance agency helping clients to find the best rates and products by working with over 20 different insurance companies. We offer a variety of coverage, including bond insurance in El Paso, TX, as well as coverage on vehicles, businesses and other commercial ventures, general liability, flooding, homes, worker’s compensation and more. Call us today to learn more!

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