Surety bonds guarantee an obligation will be fulfilled. A surety bond is typically required for construction contractors, as a license requirement for certain businesses or for people in some public and private positions of trust. Although sometimes referred to as surety insurance, a surety bond is actually not insurance at all. Rather, a surety bond is a credit agreement. If a surety company has to pay a surety bond, it has the right to demand repayment from the purchaser of the bond.
The Surety Process
A surety bond is an agreement between three parties. One party is the principal. A principal is a business or individual that has an obligation to the second party, called the obligee. To ensure the obligation is fulfilled, the principal purchases a surety bond from the third party, referred to as the surety. In the event the principal doesn’t meet the obligation, the surety must pay a sum of money to the obligee. However, a surety company does not insure against losses. Sureties only guarantee payment. The principal must sign an agreement to repay the surety. In the event the surety company has to pay the obligee, the payment becomes a debt owed by the principal.