Is a written agreement that guarantees the performance of an obligation. Another name for it is surety-ship agreement. Usually provide for monetary compensation to be paid in the event that a principle fails to perform as specified in a bond. A surety bond is not insurance, but it is a risk transfer mechanisms. It shifts the risk of doing business with the principle from the obligee to the surety.
WHO ARE THE PARTIES IN IT?
There are always at least three parties:
1. The Principal
This is you, your company or institution – the party that gets bonded. You undertake to perform an obligation that is specified in your bond. The principal in a contract bond is the contractor. It is the public official in a public official bond, the one who gets licensed in a license bond, the guardian in a guardianship bond, and so on. Obligor is another word for principal.
2. The Obligee
This is the beneficiary, the party that requires you to get bonded. It might be a person, or an entity such as a company, municipality, or government agency. The obligee receives the bond and its benefit, protection against loss. The surety company compensates it if you fail to fulfill your obligation.
3. The Surety
This is the party that issues the bond, usually a surety bond company. It guarantees that a specific obligation will be met. The surety is financially obligated to the obligee in the event that you do not meet your obligation.
What is a surety company?
This is a corporation, usually an insurance company. It Surety bonding can legally underwrite surety bonds.
IS IT LIKE INSURANCE?
No. They are both risk transfer mechanisms that provide for financial loss, and both regulated by state insurance commissions, but there are major differences between surety bonds and insurance.
– An insurance policy is a two-party agreement (insured and insurer), while most surety bonds are three-party agreements (principal, surety, and obligee).
– An insurance policy transfers risk from an insured policyholder to an insurer (an insurance company). A surety bond protects an obligee against losses, not a principal.
– You can buy an insurance policy, but you must qualify for a surety bond. It is a form of credit. A surety company will only take acceptable risks, so it will only bond qualified businesses and individuals.
– Insurance companies expect losses, and adjust their insurance rates to cover them. Surety bond companies extend credit, expecting principals to meet the legal obligations of their bonds. They do not expect losses, which severely impact their bottom line when they do occur.