What is a surety bond
A surety bond is different from insurance in many ways. If you have a insurance claim the principal pays the deductible and the insurance company covers the rest of the claim. With surety bonds if you have a claim, the surety restores the obligee to it’s original condition then the principal must restore the surety company to its original state. A surety bond involves three parties the first party is the obligee, the second party is the principal and the third party is the surety company.
How does it work?
So basically a bond works like this. The surety assumes liability for the principal if the principal fails to perform its obligations to the obligee.
What is a principal?
The Principal is the primary party who will be performing the contractual obligations. When applying for the bond the principal’s credit, financials and experience will be used to determine surety credit.
What is a surety company?
A surety company is the third party that will be backing the principal in the event of a claim. A surety company is regulated by the department of insurance. If a bond is needed for a federal license or federal contract the surety must be registered and approved by the Department of treasury and on the circular 570 list.
What is an obligee?
The obligee is the party that requires the principal to obtain bonding. The surety bond protects the obligee not the principal.
Who requires bonding?
Bonding can be required by pretty much anyone, but normally bonding is required in connection to a license or permit. These bonds are simply known as license and permit bonds. The State or Federal government will not grant your business license until the license bond is procured. Surety bonds can also be required to guarantee that the construction of a project will be completed. These bonds are known as Performance and payment bonds.