Does A Surety Bond Cover Theft?

A surety bond is a contract between the principal and the surety company that guarantees payment of any debt or obligation incurred by the principal, in return for which the surety agrees to pay the principal's debts if he fails to do so.

The surety bond is an indemnity against loss, not a guarantee of performance. If the principal defaults on his obligations under the contract, the surety pays the creditor directly.

The surety bond does not cover theft; it covers only default. In some states, however, it may be possible to use a theft policy as part of a surety bond.

Theft Insurance

Insurance companies offer several types of coverage for theft. These include:

Property insurance – This type of insurance covers damage done to property, such as furniture, clothing, jewelry, etc., while the insured person is away from home.
It also covers losses due to fire, lightning, wind storm, hail, explosion, riot, civil commotion, aircraft accident, shipwreck, vehicle collision, burglary, robbery, vandalism, earthquake, flood, snowstorm, falling object, animals, smoke, aircraft, missiles, nuclear radiation, chemical contamination, nuclear explosion, war, terrorist activity, and other causes.
Liability insurance – This type of policy protects both the insurer and the insured from claims made against them for injuries sustained by third parties who are injured because of their actions. Liability policies usually provide medical payments benefits (medical expenses) up to $1,000 per person and $2,500 per occurrence. They also typically provide uninsured motorist coverage.
Crime insurance – This type of crime insurance protects the insured from criminal acts committed by others. It includes coverage for bodily injury, personal injury, death, and property damage. Coverage also extends to legal defense costs.
Renter's insurance – Renter's insurance helps renters protect themselves against loss or damage to their belongings during their absence from the premises. It covers damage to possessions left behind when they move out of the rental unit.
Business auto insurance – This type of business insurance covers vehicles used in the course of business operations. It covers damage to these vehicles and the drivers' ability to drive them.

What Do Surety Bonds Cover?

A surety bond is a contractual agreement between the principal and the obligee. The purpose of this kind of bond is to ensure that the principal will perform according to the terms of the contract.

For example, if a contractor has agreed to build a building within a specified time frame, he must post a performance bond before beginning construction. If he fails to complete the project on time, then his surety pays the obligee the money owed.

Surety bonds are often required by government agencies, contractors, banks, landlords, and businesses.

In some cases, a company may need to obtain a surety bond even though it does not have an existing relationship with another party.

For instance, a landlord might require a tenant to post a security deposit as a condition of leasing the apartment.

However, the landlord cannot collect the deposit until the lease expires. To protect himself, the landlord requires a bond from the tenant.

Anyone who signs a contract that contains a provision requiring him to post a surety bond is covered by the bond.

However, there are limits to how far the surety bond extends. For example, a surety bond only covers losses caused by the principal's failure to perform under the contract.

Therefore, the bond does not cover losses resulting from the principal's intentional misconduct.

The principal's obligations under the contract are defined by the language contained in the contract. For example:

If the contract states that the principal will provide goods or services, the principal must deliver those goods or services.
If the contract specifies that the principal will pay someone else, the principal must make the payment.
If the contract provides that the principal will do something, such as paint a room, the principal must actually do what was promised.

Theft is not typically covered under these contractual arrangements as these contracts usually focus on the provision of services.

How Does A Surety Bond Work?

When a principal agrees to perform a contract for another person, he typically posts a bond to guarantee that he will fulfill his obligation.

The principal posts the bond because he wants to be protected in case he fails to perform. Without the bond, the other party could sue him for breach of contract.

The surety promises to pay any damages awarded to the obligee (the party to whom the principal owes money) if the principal defaults on his promise.

The surety typically posts the bond at the same time that the principal enters into the contract.

Once the principal performs his part of the bargain, the surety becomes liable for all the principal's debts. As long as the principal remains solvent, the surety can satisfy its liability by paying the obligee.

When the principal goes bankrupt, however, the surety is unable to repay the obligee. Instead, the surety must look to the principal's assets for repayment.

What Is A Surety Bond Used For?

A surety bond is used to protect both parties to a contract. The principal gives up certain rights when he posts the bond.

He agrees not to contest any claims against the obligee, and he waives his right to file suit against the obligee if he breaches the contract.

In return, the obligee agrees to release the principal from any liability arising out of the contract. If the principal fails to perform, the obligee can sue the surety instead of suing the principal.

In addition, the obligee agrees not to take legal action against the principle while the bond is outstanding.

If the principal commits fraud, embezzles funds, or otherwise violates the law, the obligee has no recourse against the principle.

Conclusion

To conclude, a surety bond doesn't normally cover theft because it isn't intended to compensate the victim. It is meant to protect the principal from being sued for performing under a contract.