Bonds

What is a Surety Bond & How Does it Work?

A surety bond is a contractual agreement entered into by a project owner or business, which guarantees that a project will be completed or business regulations will be followed. It is a legally binding contract composed of three parties:

I. The principal is the business or individual purchasing the bond to guarantee future performance.
II. The obligee is the entity that requires the bond; usually a government entity or municipality whose goal is to protect the government and its citizens.
III. The surety is the insurance company that backs the bond, providing a line of credit in case the principal fails to perform.

Surety bonds can be difficult to understand. Essentially, it is insurance for the obligee, paid for by the principal, and backed by the surety. If the principal fails to fulfill the task, the obligee may make a claim with the surety to recover losses. The insurance company will pay reparations up to, but not exceeding, the bond amount, which will then be repaid by the principal.

Obtaining a Surety Bond

Before purchasing a surety bond, it is crucial to know what type of bond you require. If you purchase the wrong one, it will be rejected by the obligee.

If your bond is for a specific contract, then you need a contract bond, which includes bid bonds, performance bonds, and payment bonds.

If your bond is not for a specific contract, it will fall under one of the following categories:

• License and Permit Bonds
• Court Bonds
• Dishonesty and Service Bonds

If you are still unsure as to which bond type you need, you can contact us for help.