Surety Bonds in Massachusetts

What is a Surety Bond?

When beginning a large project or making a big purchase, organizations and people frequently want a guarantee that the project will be completed or purchase will be as expected. While a company’s guarantee or warranty may be sufficient for small projects and purchases, major financial investments sometimes require larger assurances. Surety bonds give Massachusetts businesses that bid on large projects or sell big-ticket items a way to provide their clients and customers with substantial financial guarantees. Many different businesses in the state, such as health clubs, contractors, and auto dealers, might use a surety bond.

Surety bonds are typically sold by insurance providers, but the bonds are more akin to lines of credit than true insurance policies. They’re essentially lines of credit that are specifically used to compensate clients and customers if a project or product doesn’t meet minimum requirements.

By getting a surety bond, businesses that work on major projects and sell big-ticket items don’t have to keep thousands (or tens of thousands) of dollars in the bank in case something goes wrong. Instead, they can pay a nominal premium and have a bond available in case they need it.

What Parties Are Involved in Surety Bonds?

These bonds usually involve three different parties:

The issuer of the bond, which is the business offering the line of credit (i.e. frequently the insurance company)
The obligee, which is the business providing the service or product
The principle, which is the person or entity that receives the funds if there’s a problem with the project or product

The principle can be a direct client or customer, or it might be another party, such as the Commonwealth of Massachusetts. For instance, some state licenses may require businesses to obtain a bond or minimal amount of savings. If a bond is used and there’s an issue with a project or product, the state may receive the funds from the bond. Then, the state will usually disburse the funds to the appropriate people or organizations.

What Massachusetts Businesses Need Surety Bonds?

Many businesses in Massachusetts may need a surety bond. Sometimes, businesses are legally required to get bonds (or they’re the most affordable of a few options). Other times, businesses aren’t under a legal obligation to purchase bonds -- but they might need them in order to secure bids. A few examples of businesses that frequently get bonds are:

Car dealerships
Construction companies and developers
Collections agencies
Medical equipment providers
Health clubs
Travel agencies

Even certain professionals may want a bond. Public notaries, independent contractors, and auctioneers, depending on their work, might consider getting one.

Are There Different Types of Surety Bonds?

There are a few distinct kinds of surety bonds. Some of the different types include:

Public Official Bonds, which typically guarantee that trustees and fiduciaries will faithfully perform their duties

Probate and Other Court Bonds, which may be used to guarantee that another type of public official will faithfully perform their duties

Permit and License Bonds, which might be required by the state and usually name the state as the obligee

Contract Performance Bonds, which are typically used to guarantee contracted work

Other Bonds, like utility payment guarantees, welfare bonds, and union wage bonds

(The other bonds are fairly uncommon, and they can be extremely complex.)

What is a Surety Bond?

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