A surety bond is similar to an insurance policy. These are agreements to satisfy a “debt, default, or failure” of a party in case they do not fulfill their commitments. The parties involved in these bonds include the obligee, principal, and surety. Principals are those that must secure a surety bond. This may be a requirement to be eligible for a project, become licensed, or to qualify for another benefit.
The obligee is the party that has implemented a requirement for a surety bond. The surety is a third-party that is entering into an agreement to assume the financial liability on behalf of the principal. Often, sureties are available from designated branches of insurance companies and similarly are often sold through brokers or agents.
Energy Utility Bonds
The energy and utility markets are generally in strong demand for services. Energy utility surety bonds may be required for the financial protection of those operating in this sector. The principal in this arrangement is often a large buyer (consumer) of energy. The utility provider may require a bond in case the buyer is unable to make their ongoing payment obligations.
Examples of large consumers of energy may include manufacturing companies or other types of corporate entities. Utility service providers often use discretion when providing energy for larger consumers. The surety bond may be a requirement before the utility is accessible to the principal’s property.
Those who issue surety bonds also use discretion when deciding whether to issue a bond. For example, businesses with a history of defaulting generally must pay higher premiums for coverage or they may be denied. The premium amount that the principal must pay is based on the necessary total bond amount. This is based on the estimated potential liability involved and other factors.
Energy Contract Performance Bonds
Energy contract performance bonds may be a requirement of a state or federal agency. These commonly include those responsible for environmental compliance. Those required to secure energy performance bonds may include those actively drilling into the earth to locate oil sources or implementing solar energy grids.
These bonds may be required for those responsible for plugging wells or developing wind energy sites. The financial protection of a bond may be needed if a problem develops, such as an environmental disaster.
Energy Broker Bonds
Energy deregulation within the U.S. continues to expand. Energy brokers function as sellers between those involved in the production and the consumer. The government typically requires energy brokers to obtain surety bonds. These bonds are used as a financial guarantee to protect the general public from potential failures, which adheres to regulatory requirements.
Broker bonds are not unique to the energy industry. Traditionally, surety bonds are also a requirement for those acting as freight brokers and more.
Established Arizona Agency Provides Surety Bonds
The Gebhardt Insurance Group, based in Casa Grande, has proudly been serving clients in the region for many years now. As an independent agency, we can offer products such as insurance and surety bonds from various carriers. Contact us today at (520) 836-3244.
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