“What Is Good to Buy Right Now? Municipals? Or Corporate Bonds?”
Usually when I tell someone that I work for an insurance agency and that my product is bonds, the response from them is the question above. I’ve received that question so many times that I have a canned response, “The bonds I deal with are not something you want to buy. They are something someone makes you buy.”
So what is a bond? Simply put, it is a credit guarantee whereby a third party, usually an insurance company, guarantees an obligation from one party, the principal, to another, the obligee. The potential obligations cover contractual obligations for construction of bridges, buildings, roads, etc. to an obligation of a public official to faithfully perform the duties of their office.
The types of bonds can be broken down into three large categories:
Fidelity bonds are more like your typical insurance product. They protect an employer from embezzlement by employees. While some of these are written as a stand-alone product, today most fidelity coverage is written as a product of a company’s property coverage.
Contract bonds, or performance and payment bonds, guarantee that a construction contractor will complete a construction project according to the contract between the contractor and the project owner, and that they will pay all of the bills related to that project for labor, materials and subcontractors.
The largest category, and the one with the most variety, is commercial bonds. There are literally thousands of different types of commercial bonds and these are the types that most of our clients are required to obtain. This category contains everything from bonds on public officials guaranteeing their faithful performance, to simple compliance bonds which guarantee that a company will comply with the terms of a license or permit. When you have seen the trucks of an electrician, plumber, air conditioning contractor, roofer, etc. and they have the words “licensed, bonded and insured” on the side, usually all that means is they have posted a $5,000 to $10,000 bond required to obtain a license or permit to operate in a certain city or county.
This has been a basic introduction to bonds. Over the next several weeks we plan to explore in more detail the different types of bonds, what information is required to obtain them and how they are underwritten by the insurance company.