What is a bond?

So, I recently received a referral from one of my numerous family members, asking me if we could issue bonds.  My natural response is, sure.  What kind of bond do they need?  To which I was told, "I don't even know what a bond is for, they just asked if you could do that so I'm asking you if you can."  It got me thinking that we may want to touch on this subject.  

As per usual this will be a high level view of bonds, if you want to know more about anything specifically, just ask me.  I will get you the info!  

There are 2 basic forms of bonds, surety and fidelity bonds.  Keep in mind however there are numerous different miscellaneous types of bonds available to a variety of different needs!  


Fidelity bonds-  A fidelity bond is a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.
While called bonds, these obligations to protect an employer from employee-dishonesty losses are really insurance policies. These insurance policies protect from losses of company monies, securities, and other property from employees who have a manifest intent to cause the company loss. There are also many other forms of crime-insurance policies (burglary, fire, general theft, computer theft, disappearance, fraud, forgery, etc.) to protect company assets.




Surety Bonds-  A surety bond or surety is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation.




Surety bonds are the most common form, or at least the most commonly referred to form of bond. They guarantee one party to fulfill it's obligation to another  in monetary terms. Long story short, an insurance company is backing a contractor for $50,000 to do a job.  This means our company has bonded that contractor for that $50k, and if he falls through the insurance company will cover the costs to get the job done up to the bonded amount.  They do not do this all willy-nilly if you will, the contractor will be vetted by the company before they're backed.




Contract bonds are the most widely used term for the word bond.  However there are many other forms of surety bonds such as:

License and Permit Bonds:

• Contractor’s license bonds, which assure that a contractor (such as a plumber, electrician, or general contractor) complies with laws relating to his field. In the United States, bonding requirements may be at local or state level.
• Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import duties and taxes.
• Tax bonds, which assure that a business owner will comply with laws relating to the remittance of sales or other taxes.
• Reclamation and environmental protection bonds
• Broker’s bonds, including Insurance, Mortgage, and Title Agency bonds
• ERISA (Employee Retirement Income Security Act) bonds
• Motor vehicle dealer bonds
• Money transmitter bonds
• Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.

Commercial Bonds- Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.

Court Bonds- Court bonds are those bonds prescribed by statute and relate to the courts. They are further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies. Fiduciary, or probate, bonds are filed in probate courts and courts that exercise equitable jurisdiction; they guaranty that persons whom such courts have entrusted with the care of others’ property will perform their specified duties faithfully.Examples of judicial bonds include appeal bonds, supersedeas bonds, attachment bonds, replevin bonds, injunction bonds, Mechanic's lien bonds, and bail bonds. Examples of fiduciary bonds include administrator, guardian, and trustee bonds.

Public Official Bonds- Public official bonds guaranty the honesty and faithful performance of those people who are elected or appointed to positions of public trust. Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, law enforcement officers, and Credit Union volunteers.

Miscellaneous Bonds-  Miscellaneous bonds are those that do not fit well under the other commercial surety bond classifications. They often support private relationships and unique business needs. Examples of significant miscellaneous bonds include: lost securities bonds, hazardous waste removal bonds, credit enhancement financial guaranty bonds, self–insured workers compensation guaranty bonds, and wage and welfare/fringe benefit (Union) bonds.