Commercial bonds are a category of surety bonds designed to provide protection against financial loss due to the improper or illegal conduct of a commercial entity. A company may be required by a federal, state, or local agency to purchase a commercial bond of one type or another in order to obtain or maintain a license to do business in a particular jurisdiction. Others are voluntary in nature.

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Commercial Bonds

How Do They Work?

The government agency imposing the bonding requirement is the obligee, the company issuing the bond is the surety, and the company obtaining the bond is the principal.

A party suffering a valid loss as the result of the principal (or an employee of the principal) violating a law, rule, or regulation governing the business may file a claim. The surety will settle and pay all valid claims. In some cases, the surety may be obligated to pay fees or penalties levied by the obligee on the principal as a result of an infraction.

After paying a claim, fee, or penalty, the surety will attempt to recover that amount from the principal. The principal is ultimately liable for the amount paid out by the surety. The surety may cancel the bond after a payout, which could put the principal out of business, so there is strong motivation for the principal to resolve any problems before a claim is filed or a penalty is assessed.

How Much Do They Cost?

The cost of a commercial bond typically depends on the size of the penalty that could be imposed by the obligee. Yet there is no universal formula for determining the penalty amount, and therefore the cost of the bond. Some agencies assess a penalty based on the principal’s sales for the previous year, while others consider factors such as the number of employees, physical business locations or the company’s specific business activities. The principal’s personal credit is also a determining factor on the cost of the bond.

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Types Of Commercial Bonds

These bonds are most often required when there is the potential for financial loss by a third party as a result of the actions of the principal or its employees. The following are among the most common types of commercial bonds. Find what you need, and apply today. If you don’t see what you’re looking for, contact us, as we likely offer it in our expansive book of coverage.

JANITORIAL BONDS

Janitorial bonds are different from most other commercial surety bonds in that there is no legal requirement for janitorial companies to be bonded in order to do business. However, many potential customers will only hire a cleaning company that is bonded to protect themselves against theft and other issues.

A janitorial bond tells the public that the company stands behind its business decisions, such as its choice of employees. In the event that a customer files a claim against a bonded janitorial service due to theft by one of its employees, the surety will pay the claim and pursue the obligee/principal, the janitorial company, for repayment.

UTILITY BONDS (UTILITY DEPOSIT BONDS)

Utility bonds, also known as utility deposit bonds, protect utility companies rather than consumers. Utility companies often require a deposit from new residential or commercial customers. Customers who are likely to use a very large amount of electricity, natural gas, or water may be required to obtain a utility bond before their utility service is turned on.

The purpose of the bond is to ensure that the utility company (the obligee) receives payment from the customer (the principal). The surety pays if the obligee files a claim against the utility bond, and the surety then seeks reimbursement from the principal.

LOST TITLE BONDS

A vehicle title establishes ownership of a vehicle and is used in transferring ownership. In many states, the Department of Motor Vehicles (DMV) requires a lost title bond when someone other than the owner named on a vehicle title claims ownership of a vehicle or when the person claiming ownership cannot produce a title.

The DMV (the obligee) also requires a lost title bond when a vehicle’s title can’t be used to verify ownership of the vehicle. This may occur, for instance, when an individual buys a vehicle in a private sale but does not receive the title, receives a title in the wrong name, or loses the title before it’s transferred into the new owner’s name. The person claiming ownership of the vehicle (the principal) must purchase a vehicle title bond before a new title can be issued in his or her name. If a new title is issued but ownership is later challenged and a claim is filed, the surety will pay any required restitution and attempt to recoup that amount from the principal.

LOTTERY BONDS

In most states, an individual or business (the principal) must obtain a lottery bond before being allowed to operate lottery equipment or sell lottery tickets to the public. In issuing a lottery bond, the surety guarantees that the principal will comply with all state regulations. This includes governing the operation of lottery equipment, the sale of lottery tickets and the payment of all required taxes on ticket sales to the state lottery commission (the obligee).

This type of commercial surety bond provides protection for consumers against any dishonest business practices by the principal, such as tampering with lottery equipment or mishandling funds. The surety has the right to pursue the principal for repayment after paying a claim against the bond.

EMPLOYEE DISHONESTY BONDS (EMPLOYEE THEFT BONDS)

Like janitorial bonds, employee dishonesty bonds (also known as employee theft bonds), are not required by any government agency. A company that purchases one of these bonds voluntarily is both the obligee and the principal.

The purpose of an employee dishonesty or theft bond is to protect a company from fraud, embezzlement, theft of money or merchandise, and other dishonest acts. It does not provide protection in the event that an employee steals from a customer but rather reimburses the business for losses due to employee theft or dishonesty. This type of bond can be written to cover a designated list of named employees, to provide blanket protection covering certain designated positions, or to cover every employee.

BUSINESS SERVICE BONDS

Business service bonds protect the customers of companies that deploy workers to customer premises against financial loss due to employee theft. Janitorial services, lawn and garden services, exterminators, painting contractors, pool cleaners, maid services, locksmiths, plumbers, appliance repair services, and similar businesses typically purchase business service bonds voluntarily to make themselves more attractive to customers. In most cases, the surety will only pay a claim if the principal prosecutes the responsible employee(s).

SALES TAX BONDS

State and local governments typically require businesses that collect sales tax to obtain a sales tax bond as a guarantee that they will file sales tax information and remit sales taxes on a timely basis. Depending on the nature of the business, the principal may be required to purchase only a general sales tax bond or a specific type of sales tax bond—such as an alcohol bond, cigarette tax bond, or fuel tax bond.

The obligee (the state or local taxing agency) may file a claim against the bond if the principal fails to file and pay sales taxes on time. The surety can then attempt to recover the mount of the claim from the principal.

ALCOHOL TAX BONDS

Alcohol tax bonds are a specific type of sales tax bond required of businesses engaged in manufacturing, selling, and warehousing alcoholic beverages to guarantee the proper reporting of sales and payment of taxes or fees to a state or local taxing authority (the obligee).

WAGE AND WELFARE BONDS (UNION BONDS, WAGE BONDS)

There are a number of different names for the type of bond required when an employer hires members of a union: wage and welfare bonds, wage bonds, welfare bonds, or union bonds. The purpose of such bonds is to ensure that the employer (the principal) honors the financial terms of the collective bargaining agreement related to union dues payments, contributions to funds, and benefits.

The bond is typically required as part of the collective bargaining process the company engages in with the union before hiring union members. The surety issuing the bond must pay valid claims for salaries, benefits, or other compensation if the company fails to uphold its obligations under the terms of the bond. The surety can then seek repayment from the principal.

HIGHWAY USE TAX BONDS

Trucking companies that operate commercial vehicles of a certain weight on public highways may be required by federal and state agencies to obtain a highway use tax bond. Such bonds guarantee that the motor carrier (the principal) will pay the proper taxes and fees as well as any penalties and interest due to the agency (the obligee).

The bond amount required varies by jurisdiction. Factors taken into account in determining that amount include the number of vehicles operated by the company, their weight, and the tax reporting method. The surety has the right to attempt to recover from the principal any amount paid out to the obligee on a valid claim.

Get the construction bonds you need from Single Source Insurance, and get on with business. We offer a comprehensive selection of the best bonds at the best prices to keep you in compliance with all your industry regulations.