Commercial bonds are versatile tools that complement traditional lines of insurance and respond to a wide variety of risk situations. Also known collectively as surety bonds, commercial bonds serve a broad range of needs for many different industries.
What can a commercial bond do? Simply, commercial bonds guarantee the performance of contractual obligations that organizations accept in the course of doing business. A bond gives both parties to a contract confidence in proceeding with their business agreement. The technical terms for these parties are the obligee, or public or private organization initiating the contract, and the principal or obligor, the party that agrees to assume the risk of meeting the contract’s terms.
Which types of situations are good spots to consider commercial bonds? There are many, including:
- Workers' compensation. Large-deductible workers comp programs often require employers to post collateral, which often take the form of letters of credit (LOCs). Commercial bonds, however, can replace LOCs and free up credit for other business purposes.
- Performance and payment for service providers. These kinds of commercial bonds guarantee the performance of a contract for service, as well as guaranteeing that laborers, suppliers and subcontractors are paid. Payment bonds are additional, related protection against default by the contractor for the service.
- Reclamation bonds. Development projects can involve remediating and reclaiming land, such as mining and construction. Governments that approve such projects typically require security to ensure taxpayers are not burdened by cleanup and reclamation costs. Reclamation bonds serve as a form of security that guarantees those obligations.
- Court bonds. Judicial bonds guarantee that court costs are secured. These kinds of bonds are generally used in civil litigation where a party to a lawsuit requests a special remedy before the court issues a final decision. Another type of court bond is a probate bond, which guarantees the performance of an executor of the estate of a deceased person according to the terms of the deceased’s will or trust.
- Appeal bonds. In civil cases, courts may require parties appealing a judgment to post a bond as a sign of good faith that the judgment will be paid if the appellant loses the appeal.
- Customs bonds. This specialized commercial bond is commonly used for importing goods. A customs bond guarantees the importer will pay taxes, fees and customs duties, and U.S. law requires such a bond for the importation of merchandise exceeding $2,500 in value. Customs bonds may be required of cargo carriers that transport imported goods by ship, plane or truck, as well as warehouses that store imported items.
Advantages of commercial bonds
From the list above, commercial surety bonds offer financial protection that can apply to a wide variety of contractual obligations. Unlike property and casualty insurance, which tends to have cyclical pricing, performance bonds provide a stable source of risk mitigation. Industries that AXA XL's Political Risk, Credit & Bond team support include manufacturing, transportation, utilities, pharmaceuticals, energy, financial services, other service providers, and many more.
In addition to stable and flexible protection, commercial bonds have several advantages that bank-issued letters of credit do not. One is bonding companies have lower regulatory capital requirements than banks. Therefore, bonds usually are priced more competitively and are more readily available when credit markets tighten. Bonds also can free up capital and credit for other business purposes when they replace LOCs as collateral. Bonds also can be written for the entire term of a contract, rather than renewed annually as most LOCs are. For longer-term contracts, bonds can be a better source of financial protection than LOCs.
To find the right commercial bond solution, it’s important to work with advisors and surety partners that have both experience and financial strength.
For more information on commercial bonds, please visit axaxl.com.
About the author
Pat Dougherty is Head of Commercial Bonds in AXA XL’s Political Risk, Credit & Bond division. He has extensive experience in surety operations and financial services. Before joining 色多多视频in 2017, he held several leadership roles for leading surety organizations.
