When you’re making significant financial decisions, you shouldn’t have to worry about the reliability of the professionals who are working with your money. Surety bonds are a means of financial protection that can provide additional reassurance. Unfortunately, although many industries mandate the use of surety bonds to protect their consumers, the consumers themselves are oftentimes unaware of this means of protection.
The basic idea behind surety bonds is to limit fraud and other unethical behavior in the workplace. The best bonds encourage business owners and other professionals to follow industry regulations and make appropriate decisions—or else face paying reparation to harmed parties. For this reason, validating a professional’s bonded status is an easy way for you to confirm the credibility of those handling your finances.
How surety bonds work—guaranteeing quality service
Surety bonds function as three-party contracts that hold professionals and businesses financially accountable for the decisions they make. The three parties involved with each bond include:
- a principal: the professional or business required to purchase a bond before beginning work or performing a service
- an obligee: the entity—usually a government agency—who requires the principal to get a bond to guarantee the quality of work to be done
- a surety: the agency that financially backs the principal’s work by issuing the bond and acting as an intermediary between the principal and the obligee
For example, if a professional violates licensing regulations for his or her job, the government agency acting as the obligee can make a claim on the bond, requiring the principal to pay reparation. If, for some reason, the principal does not have the ability to provide appropriate compensation, the surety will then be responsible for compensating the harmed party up to the bond’s full amount.
Since surety providers will ultimately be held accountable for any shortcomings on behalf of the faulty principal, they take great care when issuing bonds. Before they issue a bond they thoroughly examine the applicant’s work history, credit score, and other financial records to verify the entity’s reliability and financial strength. If a surety specialist finds the applicant’s qualifications to be lacking for some reason, he will simply refuse to issue the bond. So, being able to secure a bond typically establishes a professional or business as a reputable entity to work with.
Surety bonds in finance—protection for your investments
The finance industry is one of many that utilizes surety bonds to protect consumers who work with a variety of professionals:
- Collection agency bonds require collection companies to act within industry regulations when collecting fees. These bonds compel agencies to handle funds appropriately when pursuing debt collection, which includes making sure collected funds make it to the appropriate companies. Without these bonds, collection agencies could take it upon themselves to misappropriate funds without fearing reparation.
- Insurance broker bonds protect against predatory insurance practices, such as intentionally offering inaccurate quotes or encouraging clients to use fraud when applying for a policy. These bonds also ensure that payment received by the broker will be transferred to the actual insurance company.
- Money transmitter bonds were put in place to regulate the industry at a time when many transmitting companies were taking advantage of their economic positions. These bonds help ensure such companies strictly adhere to industry regulations regarding the transmitting of funds.
- Mortgage broker/banker/lender bonds encourage mortgage specialists to provide quality services to their clients. These bonds protect against dishonest lending habits, like mortgage specialists who might encourage their clients to use fraud or other unethical practices when applying for popular mortgage loans.
- Patient trust bonds keep nursing homes, hospitals, and other such operations from mismanaging funds entrusted to them by patients under their care. These bonds help family members feel more confident when working with agencies that take care of their loved ones.
- Tax collector bonds ensure the public that officials will perform their duties appropriately by following rules and regulations as outlined by the government. For example, these bonds can resolve liability issues in regard to uncollected taxes on the part of the government.
Although you shouldn’t have to worry about the ability of professionals to conduct themselves appropriately, checking into their bonded status is an easy way for you to feel reassured about those you’re working with. Their ability to obtain a bond shows that a third party—the surety provider—has found the professional or business to be financially stable. Furthermore, if a bonded entity should choose to behave inappropriately, you have the reassurance of the bond’s financial guarantee if something goes awry.
Chris Foley writes on the topic of surety bonds.