What Is A Surety Bond?

A surety bond refers to a contract formed between three parties. The three parties are the principal, the surety, and the obligee. The purpose of a surety bond is confirmation of the surety’s responsibility to ensure that the principal will behave in accordance with the bond’s terms. Read this article to learn more about surety bonds and how they work. 

How Does A Surety Bond Work? 
The principal is the party who is responsible for performing the obligation. The obligee is the party demanding the bond as a requirement. The surety refers to the party, usually an insurance company, that is responsible for making sure the obligation is fulfilled. 

Surety bonds can be viewed as a type of insurance. In the event the requirements of the bond are not fulfilled, it is possible for a claim to be filed. If a claim is filed against the bond, the principal must repay the claim to the surety. While the surety is responsible for backing up the bond, the principal will need to sign the general agreement of indemnity. 

If the principal fulfills the obligations of the bond, there is nothing that will happen. The surety bond only comes into play when the principal fails to fulfill the bond’s obligations. 

Types Of Surety Bonds 
There are more than 50,000 types of surety bonds in the United States. Some examples include contract bonds, license and permit bonds, bail bonds, and notary bonds. Bail bonds are the most widely known type of surety bond. 

What A Surety Bond Is Not 
There are many misconceptions when it comes to surety bonds. First, a surety bond is not actually an insurance policy. The payment that the surety company makes is for the bond. However, the principal may still need to pay the debt. The purpose of the surety is so that the obligee does not have to expend time and resources to receive the money they are owed from the principal. However, the principal is still responsible for paying the claim amount. 

Another misconception that many have is that a surety bond is a bank guarantee. The surety may be deemed liable for the risks associated with the principal. On the other hand, bank guarantees are based on the financial risk associated with contracted projects. 

For more information about what a surety bond is, the different types of surety bonds, and why you may need one, don’t hesitate to contact us. 

Sources: 
https://www.investopedia.com/terms/s/surety.asp