Surety bonds are guarantees issued by an insurance company on behalf of a firm in favor of a beneficiary. They are used to guarantee completion of a project or the supply of a good or service.
The most common beneficiaries of surety bonds are government entities, for example, in relation to a road project financed by a government using taxpayer funds. Such entities may also include taxation authorities, customs authorities, courthouses, and environmental protection agencies.
In the private sector, a beneficiary is the party serving as the employer, project owner, or buyer of construction projects or manufactured products.
Surety bonds also can be used as a (permissible) payment guarantee and are either regulatory or commercial/contractual in nature.
Those that are regulatory in nature include:
- Bonds required by government in connection with a construction project, i.e., roads, airports, harbors, or rail.
- Bonds required of importers in favor of a customs authority to guarantee payment of taxes and duties.
- Bonds required for the proper care of public lands when extracting or exploiting natural resources.
- Payment bonds connected with legal disputes with a government over a tax assessment.
- Litigation bonds covering the appeal of fines, penalties, or damages arising out of legal disputes for unfair market competition.
Non-regulatory bonds are issued as contract or payment security to support contractual or payment obligations. The surety acts as a third-party guarantee.