Understanding the Difference Between Surety and Fidelity Bonds

Bonds are versatile financial instruments that can be issued by federal institutions, state governments, and even companies as a security or financing source. The issuance of a bond represents an obligation to repay a certain amount of money over a period of time – sometimes with interest – that the issuing entity has towards the person or organization buying the bond. If bonds are released as a means to raise money – for example, for investment purposes – then the buyers of bonds can essentially be seen as lenders.

However, bonds can also serve as a form of insurance against financial losses. The two most popular types of bonds are called surety and fidelity bonds. They are used in a wide variety of industries and services including title and escrow or mortgage servicing. In this article, we will provide an explanation of what surety and fidelity bonds are and explore the differences between these two important financial instruments.

Surety Bonds

Surety bonds are used as a security in a number of transactions between contractors and property owners. By the means of a surety bond, two parties enter into an agreement in which one party commits to providing another party a certain service or delivering a certain product within a fixed period of time. If the contractual obligations are not fulfilled, the party who, as a result, sustained financial losses can recover them using the surety bond. An insurance or surety company usually acts as an intermediary between the two parties. The person or company that purchases the bonds is called the principal, while the party to which some contractual obligations are made is called the obligee.

Contract surety bonds that are required by property or project owners and issued by contractors as a protection against financial risk can be further divided into 4 main categories:

  • Bid bond – a bid bond serves as a guarantee that the contractor is able to deliver a project according to the specifications outlined in the bid. If a contractor wants to withdraw from the project after a bid is won, they will lose the money placed as a bond.
  • Performance bond – related to a bid bond, a performance bond is a guarantee that the contractor will complete the work according to specific requirements outlined in the contract.
  • Payment bond – in which the contractor is the principal while its subcontractors are obligees. A payment bond is a guarantee that the contractor will pay the subcontractors for the labor once the project is completed.
  • Maintenance bond – is used for protection against financial losses that may occur if the contractor uses cheap materials or inexperienced workers. The duration of a maintenance bond is usually 12 to 24 months.

Fidelity Bonds

Fidelity bonds are, in fact, a type of supplementary insurance used by employers and corporations. They are also known as dishonesty coverage or crime insurance. Fidelity bonds are designed to protect companies against financial losses due to dishonest practices on the part of employees. Such practices may include:

  • Employee theft
  • Embezzlement of funds
  • Forgery or fraud
  • Burglary

If any damages or losses to a company’s assets occur as a result of an employee’s misconduct, fidelity bonds can be used to reimburse both the company and its customers.

Facing a Legal Dispute Related to Surety or Fidelity Bonds? Contact the Law Office of Ray Garcia, PA.

Civil litigation cases related to surety or fidelity bonds can be extremely stressful. After all, your money and reputation are at stake. That’s why you need a trusted, experienced, and highly focused attorney to offer your advice, legal solutions, and confident representation in the court. Contact us today to discuss the most effective options to solve your current legal predicament. We promise to handle your case with the utmost commitment and care that will exceed your expectations.