Bonds are instruments to guarantees the performance of a party. It has three parties. An obligee requires the bond from the principle who buys the bond from a surety company. Different bonds are used for different situations. Following are four common bonds:
Contractor License Bond
The Contractors State License Board also requires contractors to post $12,500 contractor license bonds.
Performance Bond
A performance bond will protect the owner against possible losses in a case a contractor fails to perform, or is unable to deliver the project as per established and the contract provisions. This bond requires having a collateral property or investment to back up the requirements of the surety agency. Financials and credit check of the principles and their spouses are part of the application.
Fidelity Bond (401K)
Fidelity Bond is used to protect the assets in a retirement plan from misappropriation by plan fiduciaries that have access or decision-making authority to plan assets. The Fidelity Bond limit should be 10% of the plan assets – minimum $1,000 and maximum $500,000. Exceptions exist for plans with employer stock (maximum $1 million bond) and plans with non-qualifying assets. If a plan does not maintain a Fidelity Bond, as is reflected on the annual Form 5500, it may trigger a DOL audit.
Fidelity Bond (Third Party Crime Bond)
The Third Party Crime or Fidelity Surety Bond is sometimes required as part of a service contract when the principle’s employee work in the premises of the obligee. When a covered loss occurs, the insurance company may pay up to the policy limit.