Insurance Bonds

What are Insurance Bonds?

Insurance Bond structure

Insurance bonds are a type of policy that sets out an agreement between three parties: the person purchasing the bond (the principal), the person receiving the benefits (the obligee) and the insurance company.

If the principal defaults, fails their obligations, or if a claim is made, the bond guarantees that the principal will reimburse the obligee. The insurance company will pay the obligee if the principal can’t, but then the principal will pay the insurance company back.

How Insurance Bonds work

Basically, if you get into a car accident, your car insurance policy will pay for damages to you and to whoever you hit. You’re already paying monthly, and while your premiums might go up, you don’t have to pay the insurance company back for the cost of the repairs.

You are purchasing the bond to tell other people that you can be trusted with the work, the job, or their assets. If you do not fulfill your duties or responsibilities, the bond ensures that you will compensate the other party.

Who benefits from a Surety Bond?

You (The Principal)

When you get a bond, you are signaling that you’re trustworthy and you’re entering into the contract or job in good faith. Because you get a bond, you’ll be able to take on jobs you otherwise would be prevented from doing. You are assuming the risk so that you can do the work and get paid for your labor. Make sure your bid amounts are realistic, you know what’s expected of you, and you have taken all necessary precautions to prevent issues from occurring.

Insurance Company

The insurance company is not expecting to actually pay anything. They facilitate the bond, and they are compensated with the cost of the bond.

The Obligee

The obligee, or the person asking for the bond, wants to ensure that they will not be liable for anything if you don’t meet your requirements.

What types of Insurance Bonds are there?

Fidelity Bonds

Contract Bonds

Commercial Surety Bonds

License and Permit Bonds

Public Official Bonds

Miscellaneous Bonds

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What does a bond cost and how do I get one?

Be Mindful

Many bond premiums cost between. 5% and 20% of the value of the bond, but don’t rely on those numbers, especially considering the variety of bonds out there. These premiums are paid annually. Reach out to your Montgomery Insurance agents for pricing.

When you're ready

One of our agents can talk you through the next steps for your situation. You may need financial statements, resumes, bank references, and information on the work or job you’ll be doing. Be prepared for a background check and credit report for some types of bonds. Once our agent brings together all this information, we’ll be able to process your bond. Remember, though, that although sometimes you can get your bond in as little as a day, bonds can and do take several weeks to process sometimes.

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