How do surety bonds protect consumers?

To attract customers, business owners frequently advertise their businesses as being “licensed and bonded.” Unfortunately, the average passerby won’t understand the significance of this statement or how it affects them. Before most business owners can open up shop, they must attain and agree to a surety bond that legitimizes their companies. Although not explicitly stated, surety bonds benefit individuals beyond those who sign them. They play a major role in protecting the interests of consumers, too.

Generally, a local, state, or federal agency will require a potential company to get a bond before it can open for business. The bond is a legally binding contract among three parties:

  • the principal (the individual purchasing the bond)
  • the obligee (the entity requesting the bond)
  • the surety (the agency issuing the bond)

A surety bond works as a deterrent to prevent companies from conducting unlawful or unethical business. It speaks to a company’s reputation and financial stability. A surety provider determines the risk a business poses to those it works with, including the government, other businesses and consumers. Granted that risk is low, the surety will issue a bond in some monetary amount, which communicates its confidence in the business.

The bond guarantees several things. First, the principal will uphold the regulations and expectations agreed to in the bond. The obligee agrees to mutual terms but also has the ability to file a claim on the bond if the principal should fail to meet the bond requirements. Lastly, the surety ensures that any wronged parties will be compensated for financial losses they might face.

However, the bond wouldn’t benefit anyone without consumers to make the bonded business successful. Thus, the protection these consumers receive from the bond is essential to safeguarding their interests.

For example, a used auto dealer’s surety bond prevents dealers from selling defective vehicles and provides buyers with a sense of security when purchasing from a licensed dealer.

Whether you’re a business owner or a patron, surety bonds are important to your financial security. Customers who realize the importance of surety bonds trust that a bonded business will not commit crimes like fraud, embezzlement or malpractice.  As a result, the company builds consumer confidence in its goods or services.

About the Author

Jon Gottschalk
Jon Gottschalk is the Senior Marketing Director for Suretybonds.com and regularly blogs at the Surety Bond Insider to keep consumers informed on new legislation and updates in the commercial surety industry. He is also a licensed property & casualty insurance producer in Missouri.