What is a Surety Bond?
A surety bond is a guarantee that the principal (the business that needs the bond) will adhere to certain laws or contract terms. If the principal fails to meet these terms, the surety (an insurance company) compensates the obligee (Government agency, businesses, landlords) for any losses, and then seeks reimbursement from the principal.
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When do I need a Surety Bond?
Surety bonds are commonly used in various industries, including construction (where contractors may need bonds to ensure they complete projects as agreed), in licensing (to ensure businesses adhere to regulations), and in legal settings (to ensure parties fulfil legal obligations). In general, any situation where you're required to provide a financial guarantee to ensure that you or your business meets certain obligations or standards might involve a surety bond.
When project owners are placing contracts, they typically require a form of financial security or surety from their contractor or service provider to guarantee these partners fulfil the obligations as agreed in the contract – and if not, to compensate them.
What are the types of Surety Bonds?
Performance Bond
A bond issued by a bank or other financial institution, guaranteeing the fulfilment of a particular contract.
Security /Immigration bond
A bond required by Ministry of Manpower (MOM) to employers that intend to employ Non-Malaysian work permit-holders as replacement of the S$5,000 upfront security deposit for each worker.
Warranty Bond
A bond that guarantee the project owner that the contractor who did the work will come back and fix defective work or material should an issue arise during the warranty period specified in the contract.
Employment Agency Bond
A security bond (in the form of banker’s guarantee) that is made payable to the Commissioner for Employment Agencies before an employment agency (EA) licence can be issued.
Advertising Bond
A guarantee that ensures all the contractual obligations of the advertising company to its principal (either Mediacorp Pte Ltd or Singapore Press Holdings) shall be fulfilled.
Advanced Payment Bond
A bond that typically used to underpin or guarantee the performance of a commercial contract, such as a contract for the sale of goods (where the buyer is the beneficiary) or a construction contract (where the employer is the beneficiary).
Undertaking bond
A bond requirement by the main contractor upon allocation of “Man-Year Entitlement” (MYE) to its sub-contractors to employ work permit holders. Customs Bond - It is a contract used for guaranteeing that that the importer complies with Customs regulations.
How much is a Surety Bond?
The cost of a Surety bond is based on several factors, Generally the premium is a percentage of the bond amount and ranges from 1% to 10% of the bond value. Some factors that influence the cost are:
- Bond Amount:
The larger the bond amount, the higher the premium.
- Type of Bond:
Different types of bonds have different pricing structures. Contract bonds, such as performance bonds, might have different rates compared to license and permit bonds or judicial bonds.
- Experience and Industry Risk:
For certain industries or professions deemed high-risk, the cost might be higher. Conversely, if the business or individual with a longer history of operation demonstrate stability, experience and has a proven track record and low risk, the premium may be lower.
- Bond Duration:
The length of time the bond is required can affect the cost.
- Financial health:
Sureties assess the financial health and stability of the principal. Strong financials generally lead to lower premiums, while weaker financials may increase costs.
- Claim History:
A history of claims can increase premiums or make it more difficult to obtain a bond.
Frequently Asked Questions
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The Obligee is the beneficiary under a surety bond. If the Principal cannot or will not perform, the Surety steps in and makes good on the Principal’s obligation. The Obligee also has an obligation under the bond.
The Surety’s claim department will conduct an investigation as quickly as. If the Surety does determine through their examination that the claim is valid, the Principal will be reminded of their obligations under the indemnity agreement and given the opportunity to satisfy the claim first. If the Principal fails to respond, the Surety will arrange settlement with the Obligee and implement collection proceedings against the Principal.
The principal is the person who applies for and buys the bond. In general, these are contractors and other business owners hired to do work, or required to be licensed. The obligee is the entity–usually a governmental department–that is requiring the guarantee of a surety bond. The surety is the institution who financially backs the deal, assuring the obligee that work will be done properly, or that the principal will comply with the terms of their license.
Unlike a traditional insurance policy where the Principal pays an ongoing premium for coverage, surety bonds are part insurance and part credit. Surety bonds are insurance policies for the Obligee that are backed and paid for by the Principal. The Surety sits in the middle – offering a guarantee of payment to one party and collecting the payment (if a claim is made) from the other party. When the Principal purchases a surety bond, they are buying a line of credit.
A bank guarantee assures a lender they will be paid on time, as they will cover the debt on behalf of the borrower if they become unable to pay. However, they will require collateral from the borrower in exchange for taking on this financial risk.
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