What is a Surety Bond?

DEFINITION: SUR•E•TY BOND

A surety bond is a contract between three parties—the principal (you), the surety (us) and the obligee (the entity requiring the bond)—in which the surety financially guarantees to an obligee that the principal will act in accordance with the terms established by the bond.

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How Do Surety Bonds Work?

 

To put it simply, they guarantee that specific tasks are fulfilled. This is achieved by bringing three parties together in a mutual, legally binding contract.

  1. The principal is the individual or business that purchases the bond to guarantee future work performance.

  2. The obligee is the entity that requires the bond. Obligees are typically government agencies working to regulate industries and reduce the likelihood of financial loss.

  3. The surety is the insurance company that backs the bond. The surety provides a line of credit in case the principal fails to fulfill the task.

 

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

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