What is a Surety Bond and When is it Used?

In many businesses, an unpaid contract can be the end of your ability to do business. When there are contracts for large dollar amounts, and your business depends on cash flow, not getting paid on a contract can be a devastating blow to your ability to do business and pay your bills.

If you have a solid claim but you need cash now, wouldn’t it be great to sell your lawsuit to someone else? In some ways this is what a surety is and does.

Guaranteeing Performance

A surety, which is often used in construction contracts, but can also be used in larger non-construction related contracts, puts up a bond that guarantees that you get paid under your agreement with the other side in the event that the other side to the contract does not pay you or doesn’t pay you timely.

If there is a default (which is often specifically defined in the surety contract), the insurance company that put up the bond will pay you and the insurance company then handles the lawsuit, essentially stepping in your shoes to pursue the claim against the other side.

The insurance company, of course, will keep whatever they recover from the other side in the lawsuit.

When Are They Used?

Many large entities that need to make sure they get paid, like government agencies, will use surety contracts to make sure they get paid by their contractors or those doing other work for them.

In that way, a surety can be helpful also to the other side (the side that isn’t guaranteed payment by the surety), because surety bonds make companies and entities more likely to do business with smaller or untested companies, knowing that if anything happens, the surety insurer will protect them.

Of course, like an insurance company, the surety isn’t going to just insure every contract. It will look at the contract it is guaranteeing, and the parties to the contract, and do a risk analysis before obligating itself to pay under a surety bond.

How The Surety Pays

If there is a lawsuit between the parties with a surety involved, the aggrieved party that is insured will sue the other side to the contract as they normally would, but also will sue the surety.

Sometimes, if the default really is caused by the party that is insured, the surety insurer will pay the other side, and then sue their own insured, for the money the surety had to pay because of their insured’s default—but this is in rare cases where a party is blatantly at fault for defaulting on a contract.

Types of Surety Bonds

Surety bonds can guarantee performance under a contract, or can be longer term, which can insure for lawsuits after a project may be finished (for example, lawsuits involving defective workmanship after the contract has, technically, been completed).

Need help with your business contracts? Call the West Palm Beach commercial litigation lawyers at Pike & Lustig today.

Source:

suretybonds.com/contract-bonds.html