What is a Surety Bond?

surety bond

 

A surety bond is a contract between three parties, the principal, the surety and the obligeewhere the surety financially guarantees to an obligee that the principal will act accordingly with the terms set by the bond. Surety bonds are often difficult to understand , as their purpose is different depending on which perspective you are coming from. When it comes to surety bond claims, it is mandatory to pay every penny, plus legal costs.

How Do Surety Bonds Work?

 Surety bonds guarantee that specific tasks are fulfilled. Therefore, this is achieved by bringing three parties together in a mutual, legally binding contract.

  • The principal is the individual or business that buys the bond to guarantee future work performance.
  • The obligee is the entity that wants the bond. Obligees are also typically government agencies working to regulate industries and decrease the possibility of financial loss.
  • The surety is the insurance company that backs the bond. The surety also provides a line of credit in case the principal fails to complete the task.

The obligee can make a claim to recover losses if the principal does fail to complete the task. Therefore, if the claim is valid, the insurance company will pay dues that cannot exceed the bond amount. The underwriters will then expect the principal to pay them back for any claims paid.

What is the Most Common Type of Surety Bond?

Commercial Surety Bonds are required of individuals or businesses by the government, legislation or by other entities. Furthermore, Travelers Bond & Specialty Insurance provides the following types of commercial surety bonds:

  • License and permit bonds – required by state, municipal or federal ordinance or regulation. These bonds may also be a requirement as a condition for engaging in a particular business or practicing a specific privilege. Examples include performance and payment bonds, customs bonds, tax bonds and warehouse bonds.
  • Court bonds, including:
    • Judicial bonds, mandatory of  either a plaintiff or defendant in a lawsuit, to reserve the rights of the opposing prisoner or other interested parties
  • Fiduciary bonds – required of those who administer a trust under court supervision.
  • Public official bonds – required by law for certain holders of public office, to protect the public from misbehavior by an official or from an official’s failure to correctly perform duties.
  • Miscellaneous bonds – Bonds that do not fit into any of the other categories above.