The Truth Behind Three Surety Bond Myths

3 January 2017
 Categories: Business, Articles

Although surety bonds are used in a wide array of industries and for a number of reasons, there are still quite a few misconceptions floating around about them. To ensure you're getting the right product for your needs, here is the truth about three surety bond myths.

Myth #1 – Surety Bonds are Insurance

Possibly the most common misconception about a surety bond is it is a type of insurance product. Surety bonds function similar to insurance in that they both pay out when a certain event occurs. You are also required to pay a premium for the coverage, but that's where the similarities end.

Surety bonds are a three-party contract (involving the oblige, principal, and bond company) designed to compensate the person protected by the bond (i.e. obligee) in the event the principal fails to uphold the terms of an agreement he or she has with an obligee. The most well-known kind of surety bond is a bail bond where the bail company pays the court a certain amount of money if the defendant fails to appear for his or her hearings as required. The bond only exists for one specific transaction, and the contract for the bond ends once the transaction is completed.

Myth #2 – You Make Monthly Payments on Surety Bonds

Another myth born out of people confusing a surety bond for insurance is that you must make monthly payments on the bond. In reality, you only make a one-time payment, and that payment covers the entire contract period. The full payment must be made upfront, however, and is typically a percentage of the actual bond amount. For instance, a company may charge a fee of 10 percent the face value of the bond. The covered party still gets the full amount of the bond if you don't fulfill the terms of the contract as agreed.

In rare cases, a surety bond company may accept the bond fee in payments. If the company required a particularly high fee, it may allow the buyer to make payments on it over a few weeks or months rather than require the whole thing upfront, for instance. However, this is not an industry standard practice.

The fee you pay is determined by several factors. Your creditworthiness and financial means play a big role. If you have poor credit, you may be required to pay more upfront for the bond. Other factors that influence the bond fee include the law (some fees such as bail bonds are regulated by state or federal law), your history with the bonding company, your claims history, what the bond is for, and the bond amount. If you need a bail bond, it's a good idea to shop around for the best rate.

Myth #3 – A Bond from One State is Good in Another

A third myth is that a bond purchased in one state will suffice for your needs in another state. This is not true and could get you into a lot of legal trouble if you attempt to use a bond across state lines.

Every state has specific rules and regulations surety bonds must adhere to which may be based on what they're used for. In Oregon, for instance, auto dealerships must post a $40,000 surety bond to get a license, while the minimum amount in California is $50,000. So a surety bond written for Oregon likely won't be sufficient to cover a dealer operating in California.

On top of that, a surety bond written in Oregon would be subjected to the contract laws in that state. If there was a legal problem, the court in another state would defer to Oregon's laws, or you may be required to sue in Oregon to resolve the issue. It's best to just get a surety bond in the state where it's required to minimize the legal hassles.

For more information about surety bonds, contact a local bond company like NFP, P & C, Inc.