Are You Surety?

You contract with a technology company to develop an expensive customized software package, but they fail to deliver. Do you have any recourse other than filing a lawsuit? You do if you required that vendor to provide a surety bond as a condition of your purchase agreement.

A surety bond is a special type of insurance where the surety company guarantees to one party (known as the obligee) that another party (known as the principal) will fulfill a contract or obligation. These bonds are most commonly used in the construction industry, but they are suitable for use in a variety of commercial situations.

According to Robert J. Duke, director of underwriting for the Surety Association of America (SAA), surety bonds are useful whenever you're contracting for products or services and a failure to perform on the part of your supplier could result in an economic loss for your company. If the principal defaults, the surety company will then step in and do one of two things: Either it will fulfill the contract through another source or it will provide you with financial compensation. Duke says the cost of a surety bond typically ranges from 0.5 to 2 percent of the bond amount.

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You can also use a surety bond to guarantee your own performance or demonstrate your financial responsibility. For example, Duke says, when you sign a lease, the landlord may want a guarantee that you'll honor the terms of the lease. While a letter of credit is usually acceptable, a surety bond is an affordable alternative that does not tie up your credit resources. Surety bonds can also be used in lieu of a cash deposit for utility services.

Most surety companies work through independent insurance agents. Your current agent should be able to help you obtain a surety bond. Alternatively, you can look for a surety company in the Yellow Pages under "bonds," or visit the SAA's Web site at www.surety.org.

Jacquelyn Lynn is a freelance business writer in Orlando, Florida.

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