Although surety bonds have been used as a means of legal reinforcement for decades, many New York business owners only learn about their benefits once it's too late. Only after they're in the midst of a lawsuit for failing to meet a bonding requirement do they care about why they need one. To prevent such situations, business owners should understand a few basic legal functions of New York surety bonds.
Surety bonds are legally binding contracts.
Each surety bond that's issued functions as a legally enforceable contract that binds together three parties.
- The principal is the business owner that purchases the surety bond.
- The obligee is the entity, typically a government agency, that requires the surety bond.
- The surety is the agency that executes the bond, thus providing a legally binding financial guarantee that the principal will fulfill certain obligations.
If a principal fails to meet the bond's terms, harmed parties can make a claim to gain reparation. For example, earlier this year the NewYork State Liquor Authority revoked five alcoholic beverage licenses and cancelled 10 more for liquor law violations. The authority requires all businesses with a retail liquor license to maintain a $1,000 surety bond. As is customary with liquor license revocation and cancellation in New York, the authority made claims on most of the bonds and collected a total of $12,000.
The surety that issued the bond is ultimately responsible for paying any claims, but in some cases the principal signs an indemnity agreement as a legal promise to repay the surety for potential losses. When a claim is made on a bond, it is examined on an individual basis to determine the obligation each party held under the bond's legal language. Before purchasing a surety bond, applicants should always be sure they understand the contractual obligations to which they're agreeing — no matter the specific surety bond type.
Surety bonds regulate industries and keep government agencies from losing money.
When business owners are looking to buy surety bonds, it's typically because they have to fulfill some sort of requirement outlined in a law that regulates the profession. For this reason license and permit bonds are some of the most prevalent in today’s bonding market. These bonds are required as a prerequisite to getting a business license. For example, New York auto dealers must post a surety bond before they can be licensed to sell cars in the state. As such, New York auto dealer bonds reinforce state laws that regulate car dealerships.
Surety bond requirements also protect government funds as well as taxpayer money. For example, contract bonds are used by New York's construction industry to guarantee that contracting firms complete projects appropriately. If a contractor abandons work on a publicly funded project, the government can make a claim on the bond so the funds won't be lost.
Surety bonds protect business owners and their customers.
The surety bond process is especially valuable because a neutral third party, the surety, evaluates the applicant before determining whether to issue a bond. The surety bond process can be frustrating for some applicants, and for good reason. Because surety providers want to avoid claims, they set stringent qualifications for their applicants. Surety providers are hesitant to issue bonds to applicants that have low credit scores, poor work histories or other signs of financial instability. The nature of this process keeps such individuals from entering the market, which protects consumers and legitimate companies from working with or losing business to risky enterprises.
Whatever the specific law be that requires a surety bond, rest assured it was put in place to protect against financial loss, whether it be on behalf of consumer purchases or government funds. Failing to maintain a surety bond as required by law can mean legal action for a business owner. Although the surety bond process might seem like a hassle to business owners who need bonds, the legal implications should be taken seriously.
This article was written by Danielle Rodabaugh, editor of the Surety Bonds Insider. One of the publication's ongoing goals is to educate professionals and their lawyers about the legal implications of surety bonds.