WHAT IS A SURETY BOND?
A surety bond ensures contract completion in the event of contractor default. A project owner (called an obligee) seeks a contractor (called a principal) to fulfill a contract. The contractor obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.
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.
The principal is the individual or business that purchases the bond to guarantee future work performance.
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.
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.
People often wonder what surety bonds are after they’ve been told they need to buy one.
Most people need license and permit bonds before they can get their business licenses.
Construction professionals often need contract bonds before they can work on publicly funded projects.
Some business owners choose to buy business service bonds to protect clients against employee theft.