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What does a Bonding Company do?

By Sandi Johnson
Updated May 16, 2024
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A bonding company provides protection in the event of a loss, much like an insurance company. Unlike a traditional insurance policy or insurance agency, a bonding agency does not protect the insured or obligator, but rather those to whom the obligator could potentially cause financial harm. For example, should a residential cleaning crew steal items from a customer's home, a surety bond ensures compensation for the customer. The bonding agency then pursues redress from its customer, the cleaning company.

Surety bonds bear a striking resemblance to insurance policies, both in principle and method of purchase. Insurance agents often nurture professional relationships with insurance underwriters as well as surety bond underwriters, thus acting as both an insurance agency and a bonding company. Some companies specialize in providing only bonds, however, rather than offering both bonds and insurance policies.

The process for obtaining a bond is more involved than typical insurance. The obligated party must demonstrate its trustworthiness to the bonding agency. For a business, the bonding company requires proof of financial stability, ethical business operations, and compliance with local laws. For individuals, the process is as simple as swearing an oath and purchasing the bond, but can also involve character references, personal credit histories, and other documentation. Since the purpose of any bond is to make compensation to another business, individual, or government agency in the event of loss, noncompliance, or fraud, assessing the risks associated with any bond applicant is an important function of any bonding agent.

Whether offered by a bonding company or an insurance agent, surety bonds include numerous bond types, depending on the specific obligations and parties involved. Public official bonds, probate bonds, contract bonds, license and permit bonds, and miscellaneous surety bonds each provide protection in different circumstances. An individual or organization must match the needs of its obligation or industry to the appropriate bonding company, as not all bonding agents offer every bond form. An insurance agent who offers probate and contract bonds does not necessarily offer public official bonds.

In terms of the different bond forms, most individuals are familiar with contract bonds. Construction companies and repair professionals typically refer to themselves as "bonded," meaning they have surety bonds to protect against theft or damage, as well as to ensure code compliance and contract performance. In such cases, contractors secure two or more separate bond forms. A miscellaneous surety bond protects in the event of loss to the customer due to theft or damage, while contract performance bonds ensure work meets contract specifications. Some municipalities require license and permit bonds to secure compliance with local building codes, lest the contractors' bonding company pay fines on its behalf.

Probate and public official bonds generally secure financial responsibility for an individual representative of an estate, public agency, or nonprofit organization. In order to become a conservator, estate executor, or other court ordered officiator, most municipalities require some form of probate surety bond to protect the assets of a trust from fraud. Public officials, such as tax collectors, notary publics, judges or treasurers often secure surety bonds against mismanagement or misappropriation of public funds. Public policy, local laws, and government regulations determine what offices, capacities, businesses or private individual obligations necessitate the purchase of a surety bond from a bonding company.

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Discussion Comments
By Niceptosta — On Dec 10, 2013

Owners of small cleaning companies might want to consider using a bonding company to buy a bond to protect themselves against theft claims made by customers. If a customer said that an employee stole jewelry worth several hundreds of dollars, the customer could make a claim with the bonding company.

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