What Are Bonds?

Bonds are commonly used in certain large contractual agreements to give one party reassurance that the other party will uphold their end of the deal. Should the one party fail to meet their obligations, the bond may compensate the other party.

There are many types of bonds, and they’re offered by a number of different organizations. Those that insurance companies offer are usually used for commercial endeavors. For example, a liquor store, car dealer or contractor might purchase a bond from an insurer.

Who Makes a Bond’s Payments?

In most cases, the obligor is the party that pays a bond’s payments. They’re normally responsible for making the payments since it’s their work that the bond backs up.

When bonds are purchased from an insurance company, the payments are made to the insurer in the form of premiums. The insurer’s role is typically that of the surety.

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What Parties Are Involved in a Bond?

Bonds are technically three-way contracts, even though they’re used to provide reassurance between two parties. The third party is the one that provides that reassurance. Formally, the parties are called the:

  • Obligor, who has an obligation to fulfill an obligation
  • Obligee, who is having the obligatory work done for them
  • Surety, who provides reassurance in the form of financial compensation

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If the obligor fails to meet their duties and the failure negatively affects the obligee, then the surety may pay the obligee for their troubles and loss. How much is paid and when it’s paid is determined by the terms and conditions of the bond. After making payment to the obligee, the surety will frequently come after the obligor for the money paid. The obligee, however, usually keeps the funds even if the obligor doesn’t pay or drags out paying.

As an example, assume a city government contracted with a construction firm to erect a public building. The government might require the construction firm to purchase a bond in case the firm stops building mid-construction. The government would be the obligee, the construction firm would be the obligor, and a surety would supply the bond. If the project fizzled out, the bond might compensate the city.


What Types of Bonds Do Businesses Purchase?

There are at least three main types of bonds that businesses purchase. Each one is used in a different situation.

License bonds may be needed before a business can obtain a license. For example, a city government might require a business to purchase a specific license bond before the city will grant that business a license to operate within municipal boundaries. These bonds normally guarantee that a business will follow all applicable codes and laws.

Performance bonds generally affirm that a business will perform its duties per the stipulations of a contractual agreement. These bonds are frequently purchased by construction firms and contractors as a guarantee that they’ll finish the projects they work on.

Bid bonds are also often purchased by construction firms and contractors. These bonds confirm that a business which submits a bid for a project will follow through and complete the project if selected.

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What Are Liquor Bonds?

Most liquor bonds are specialized license bonds that have been designed for businesses that sell alcohol. These bonds typically provide reassurance that a business will pay the sales tax it collects on liquor that’s sold, and many states require businesses that sell alcohol to purchase these bonds before getting their liquor licenses.

How Can Businesses Get Bonds?

For help purchasing a bond, contact the independent insurance experts at World Insurance Associates. Our agents are familiar with many types of bonds, and they can help you find the right one for your business.


Meet Your Industry Specialist

Jeff Kroeger

Jeff Kroeger

Principal, Senior Vice President,
Head of Commercial Lines

In addition to being Head of Commercial Lines, Mr. Kroeger also manages the company's hospitality book of business and is that unit's primary producer. He is a graduate of Montclair State University and was named a 2015 Young Gun by Insurance Business America.

Jeff has been providing exceptional insurance for restaurants, bars, nightclubs, and more for many years. He understands the unique challenges this industry faces and delivers risk management solutions to best match a company's specific situation.

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