What is a Surety Bond?
A surety bond is a generic term to describe many types of bonds. It is a three party contract, with the three parties being:
- The principal – the primary person or business entity who will be performing a contractual obligation
- The obligee – the party who is the recipient of the obligation (usually a government entity)
- The surety – who ensures (guarantees) that the principal’s obligations will be performed. Sureties are similar to (sometimes divisions of) insurance companies.
Through this agreement, the surety agrees to uphold – for the benefit of the obligee – the contractual obligations made by the principal if that principal fails to uphold its promises to the obligee. The surety bond is provided so as to induce the obligee to contract with (or license) the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement. The qualification process is much like that of obtaining a line of credit at the bank.
There are two main categories of bond types: Contract bonds and Commercial bonds.
Contract Surety Bonds guarantee the satisfactory completion of a specific contract. Examples include Bid Bonds, Performance Bonds, Payment Bonds, Supply Bonds, Maintenance Bonds, and Subdivision Bonds.
Commercial Bonds provide a guarantee per the terms of the bond form.