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December 29, 2023

The Basics of Bonds

As a responsible business, you must account for many risks and exposures amid your operations, including those that may impact other parties. It may be especially critical to consider how your own shortcomings and errors could impact the financial interests of your customers and clients, as failing to deliver expected goods and services could have far-reaching ramifications. Given their own potential losses, other parties may have little recourse but to file a lawsuit against your organization in these situations. Fortunately, the financial and reputational consequences of these situations may be alleviated by acquiring and maintaining appropriate bonds. 

What Are Bonds? 

Although bonds may sometimes be referred to as bond insurance, your company should understand that these terms are not synonymous. While both insurance policies and bonds can provide financial security to those who purchase them, the former are generally ongoing agreements applicable to various and multiple incidents for as long as the coverage remains applicable, while the latter may be acquired for a single project or contract. 

How Do Bonds Work? 

Bonds are often purchased to provide financial protection and peace of mind for parties who enter into formal business agreements. For example, contractors and construction firms may be required to acquire bonds before being awarded jobs in order to provide property owners or developers with recourse should services fail to be delivered on time or as agreed upon. 

While there may be many subcategories of bonds, two of the most commonly purchased in the United States are surety bonds and fidelity bonds. 

What Are Surety Bonds? 

Surety bonds generally act as contractual agreements between three parties and function in the following manner: 

  • The principal, such as your business, purchases bonds to provide financial security for the obligee. 
  • The obligee, such as a client or customer, determines whether surety bonds are necessary to protect their financial interests. 
  • The surety, such as an insurance company, underwrites and maintains the bonds. 

If your business is unable to fulfill its duties to the obligee, this individual may receive compensation through the surety bonds you’ve purchased. At this point, the surety can then seek reimbursement from your organization. This may help your company avoid being sued by your client and limit reputational harm. 

What Are Fidelity Bonds? 

Also known as honesty bonds, these products can help financially protect you and your customers from dishonest or criminal acts committed by your employees (including contracted workers). Although exact details may vary, fidelity bonds can generally render financial aid in response to the following incidents: 

  • Theft 
  • Forgery 
  • Fraudulent transactions 
  • Burglary 
  • Property damage 

How to Get Bonds for Your Business 

Bonds may serve an essential role in ensuring adequate financial security for your organization, as well as that of your clients and customers. In addition, many clients, such as developers and government bodies, may require you to retain certain bonds before even being eligible for a project. 

With these things in mind, your company should reach out to the dedicated and knowledgeable professionals at Select Insurance LLC. Our experienced staff is committed to serving businesses in the Abbeville, Honea Path and Anderson, South Carolina, areas and will help you understand and secure appropriate bonds. Contact us today to learn more. 

This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information. 

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