Bonds protect a company's financial interests against risks. A surety bond is a form of insurance against the work of service contractors. If you hire a private contractor for any type of project, you'll want to make sure the contractor takes out a surety bond. A fiduciary bond protects someone who needs an executor or guardian. Employees who act on behalf of the company in a financial capacity may need to take out a fiduciary bond.
A surety bond protects a company against a vendor's action or inaction. The company that hires the vendor is not responsible for purchasing the bond. If the vendor does not complete the job he was hired for, the bond company makes sure another vendor will. The bond company also provides financial compensation if it can't find a replacement. A fiduciary bond protects a company -- often the corporate entity -- against employees who make poor financial decisions, such as an employee who embezzles company funds for personal gain.
Surety and fiduciary bonds differ in terms of whose performance is guaranteed. A surety bond is a way to ensure that a company -- a public or private vendor -- fulfills the terms of a contract. Most construction projects, for example, require the vendor to meet certain standards, including standards that stipulate the contractor has to use specific types of materials. A fiduciary bond guarantees the performance of one or more individuals. A court usually orders a fiduciary bond when financial assets are significant.
Types of Surety Bonds
The types of surety bonds include bid, payment, performance and ancillary. A bid bond helps make sure a vendor who wins a bid will sign the contract and that the winning bidder takes out payment and performance bonds. A payment bond requires the vendor to pay any subcontractors or suppliers. The performance bond stipulates that the main vendor will live up to the contract's specifications. An ancillary bond ensures that the vendor fulfills critical aspects of the project's contract; these aspects may not be performance related.
Types of Fiduciary Bonds
Common types of fiduciary bonds are executor, conservator and trustee. An executor of an estate distributes or disposes of financial assets according to a legal document. Financial assets could include real estate, trust funds, savings accounts and investments. An executor bond ensures the executor acts in the best interests of the estate. Conservator bonds insure the actions and decisions of someone who manages an estate because the owner or owners are not legally competent. Trustee bonds back the actions of a trustee, who manages any remaining assets of a bankrupt estate.