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What Is A Surety Bond?

A Surety Bond is a basic term that describe some different types of Bonds. Surety bonds are sometimes mistaken for insurance. But, surety bonds are different to insurance, because of the way they work and how they are underwritten.

Think of a surety bond as a guarantee. What The bond is guaranteeing is in the written bond language. Surety bonds differ from insurance as there are always 3 parties involved.

The 3 parties involved are:

- The Principal - the primary business or person entity who will be performing a contractual obligation

- The Oblige - the party who is the recipient of the obligation, normally a government entity

- The Surety - who ensures, guarantees the principal's obligations will be performed. Sureties are therefor similar to insurance companies.

With this agreement, the Surety agrees to uphold - for the benefit of the oblige - the contractual obligations made by the principal if that principal fails to uphold its promises to the oblige. The Surety Bond is provided to induce the oblige to contract with the principal, i.e., to show credibility of the principal and guarantee performance and completion as per terms of the agreement.

Remember There are 2 main categories of Surety Bonds:

1. Contract Surety Bond

2. Commercial Surety Bond

A Contract Surety Bond guarantees a specific contract. A Commercial Surety Bond guarantees the terms of the Bond form instead of a contract.

Surety Bonds are most often used in the Construction industry. To obtain a contract, the General Contractor must provide the project owner (oblige) a Surety Bond for its performance of the terms as per the contract. Owners or Contractors may also provide a Payment Surety Bond to ensure that Subcontractors and suppliers are paid for work done. A Payment and Performance Surety Bond is a must for General Contractors on all U.S. Federal Government Construction projects if the price exceeds $100,000.00.

The Principal will pay a premium, usually annually in exchange for the Surety Company's financial backing to extend Surety credit. If there is a claim, the Surety will investigate before paying the claim. If it's a valid claim, the Surety will pay the claim and then turn to the Principal for reimbursement in the amount paid out plus any legal fees incurred in the process.

We hope you you found the answer to your question "what is a Surety Bond?" Feel free to browse around on this site for some more information on Surety Bonds.