What Does It Mean To Be Bonded?
Many people come to us asking, “What does it mean to be bonded?” They often know they need a bond, but they’re simply not sure what it is they’re being asked to purchase. They sometimes don’t understand why they need a bond and what the process of bonding entails. At Meadowbrook Direct, we’re experts at bonds, so we can walk individuals through the complexities of getting bonded – regardless of the type of bond required.
What is Bonding?
Bonding, or getting bonded, is part of a process many people have to go through as part of being licensed and/or insured in a particular type of work or legal situation. Bonding satisfies someone’s need for protection, financially, ethically, and/or contractually. The “someone” can vary according to the bond needed.
There’s much to explain regarding bonding. In short, bonding means a business or individual purchases a guarantee of payment from a bonding/surety company for possible mistakes the individual or business might make. A surety bond can be required to begin operation of a line of work, or it can be a protective measure outside of what’s necessary to do a job.
Surety Bonds Explained
Surety bonds are ways that businesses, government employees, and individuals engaging in contracts can assure others they will honor their agreements. If they don’t, then customers, clients, or the public served is protected from damages.
If a business, civil servant, or individual engaging in a contractual matter breaks a promise and someone suffers financial loss, those affected can file a claim against the bond, and the surety bond can offer reimbursement.
Parties Involved in Surety Bonds
A surety bond is essentially a contract between three entities:
- The Obligee – This person or entity that requires the surety bond (typically a company or government agency)
- The Principal – The person or entity that purchases the surety bond
- The Surety Company – The company backing the bond and who provides the line of credit for the Principal in the case of an unfulfilled contract
As an example, states (Obligees) often require businesses selling motor vehicles (Principals) to purchase a surety bond. Likewise, mortgage brokers typically need to be bonded, as do contractors. In these lines of work and others, the principals purchase bonds as part of the process of getting licensed and doing business. These principals should buy their required bond from a surety company, which then offers protection to their clients, customers, and often partners in business.
Why Are Bonds Necessary?
Surety bonds protect people from unethical and damaging business practices. When a business or individual purchases a bond, they shouldn’t plan to use it, because if they do, it means they’ve engaged in a harmful act. Even with a surety bond, the responsibility to act legally and ethically falls on the principal. If that responsibility is breached, a consumer or member of the public can file a claim against the bond; then the surety company pays the claim, should it be proven correct.
However, the principal or owner of the bond must repay the surety company for any claims. This is why the bond is thought of as credit, which ultimately no one wants to use.