What Are Fidelity & Surety Bonds?

Surety and fidelity bonds are a form of insurance issued by licensed insurance companies and are used to manage risk and protect against damage or loss in commercial transactions. Sometimes the bonds are required by law before commercial parties may engage with each other. In other cases, the bond may be obtained as needed when there is risk or concern about the performance of an employee or contracting party.

Surety Bonds

A surety bond is a legal document created between two parties, a principal and an obligee, guaranteeing the completion of a contract. Surety bonds require the person performing the job, known as the principal, to pay a set amount to be held by the bond company to guarantee the principal's performance. When the principal does not perform according to the stated outcome, the surety bond requires a payment to the obligee for damages, time wasted or other problems associated with an incomplete performance. For instance, a business owner may create a surety bond to manage how a independent worker completes an important project. The surety bond might include a description of what work must be performed, the date on which the project must be completed and an amount to be paid if the obligation is not met.

Fidelity Bonds

A fidelity bond is a particular type of surety bond designed to protect a business owner or hiring party from damage or mismanagement by an employee. Fidelity bonds are typically created to manage long-term relationships and not individual projects. The bond is used to enforce proper dealings and honesty by employees and prevent damage and theft that might occur. When employee is represented by a union, the bond might require the union to pay any cost resulting from the dishonesty of -- or damage committed by -- the employee.

Bond Types

States and local governments often require general contractors to pay a bond when accepting a contract. A license bond requires a principal to comply with codes and regulations the obligee has established and is often required when a state or local license is assigned to a professional, tradesman or other entity. Permit bonds are used to grant privileges such as a sign or driveway permit. Public official bonds guarantee the behavior of appointed or elected officials such as judges, police officers or a notary public. Probate bonds are used to guarantee a faithful and honest performance by trustees and fiduciaries. Court bonds, also known as judicial bonds, might be used when someone seeks legal relief or benefit from another party, such as an appeal, an injunction or a release of lien. There are two common types of fidelity bonds -- a blanket and a schedule bond. Blanket bonds cover all employees of the company unless a person is specifically excluded. This type of fidelity bond is used most often by companies employing large numbers of workers, those with frequent turnover of employees or by nonprofit organizations. Schedule fidelity bonds are used when employees have greater responsibility, especially when combined with handling large amounts of money. This type of bond is called a schedule bond because it contains a schedule of employee names or the positions that the bond covers.

Bond Qualifications

Surety and fidelity companies evaluate each applicant's compatibility for a bond. Evaluation might include careful consideration and review of an applicant's financial record by requesting income tax documents or financial statements. A background check is usually conducted to establish the candidate's level of honesty and to uncover court records.

Bond Limits

In many states and local governments, the amount of a bond may be set by law. For example, a county government may set a notary license bond at $5,000 payable at the time the license is applied for. In another example, a state may set a contractor or tradesman license bond at $25,000, which is also required when the license is applied for. Fidelity bonds may be paid for by establishing a premium to be paid by the company on a monthly, biannual or annual basis.