Where did it all start
Surety bonds are an important part of doing business these days. In fact, in some industries, a surety bond will be required, before a business entity can begin operation. Unfortunately, many people are unfamiliar with bonds and what they do. If you plan on opening up your own business, it is important that you understand a little bit about the history of surety bonds.
What Is A Surety Bond?
While there is an unlimited array of surety bonds, they all work around the premises. A Surety Bond is classified as a contract that involves three parties. These three parties would include the surety, the principal, and the obligee.
- The surety – this is the underwriter that issues the bond and ensures the obligee that the principal will fulfill the terms of the contractual agreement.
- The principal – is the contractor or business that is going to be performing the work and financing the project.
- The obligee – is basically the client or project owner. This individual will be responsible for bidding out the project and hiring the contractor.
The Existence Of Surety Bonds
Surety bonds have been around for quite a long time. However, they used to be known as a suretyship, but they have always existed to protect the client or consumer. Research shows that the first record of a suretyship was discovered on a Mesopotamian tablet that was written around 2750 BC.
The first corporate surety was a London-based company developed some time in 1840 and by 1865 the whole concept made its way to America. However, the business failed, but in 1894 congress passed what was known as the Heard Act. This Act required contractors to obtain a surety bond on all projects that were funded by federal agencies.
Oftentimes, people confuse surety bonds with an insurance policy, because they both protect consumers in some sense. However, they are not quite the same thing. For instance, a surety bond is not designed to protect the business owner, in the same way that insurance policy would. If a client files a claim on a surety bond and is awarded the payout, it is possible that the principal may be forced to repay the underwriter.