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What is a Surety Bond?
A bond is issued by an entity “the Surety” on behalf of a second party “the Principal”, guaranteeing that
the second party will fulfill an obligation or series of obligations to a third party “the Obligee”. In the
event that the obligations are not met, the third party will recover its losses via the bond.
While Surety bonds are typically issued by an insurance company, they are not insurance. It is financial
assurance given by a Surety to an Obligee (typically a government entity) ensuring that money damages
will be paid in the event that the Principal either defaults, fails to uphold its promises, or becomes
insolvent.
Surety bonds are required for many government jobs, construction jobs or by the court. Additionally,
certain industries are also required by federal, state, or local governments to have bonds before a
business license will be issued in order to protect its citizens.
The principal pays a premium in exchange for the surety’s commitment to guarantee a bond(s) to an
Obligee. If the principal defaults and the surety turns out to be insolvent, the bond worthless. Which is
the reason why insurance companies, whose financial strength and solvency is verified by private audit
and/or governmental regulation, are typically granted licensing and authority to underwrite Surety Bonds.
In the event of a claim, the surety will investigate, pay, and typically seek reimbursement from the
principal for the claim amount paid plus legal fees incurred. In some circumstances, when the principal
is unable to fulfill its obligations, the surety has chosen to “Subrogate” which includes substituting for
the principal in order to fulfill the terms of an obligation and/or recovering damages.
Definitions
SURETY
BOND
PRINCIPAL
OBLIGEE
SUBROGATION