Surety Bond Guidelines
What is a Surety Bond and How Do They Work
A Surety Bond
Is a written agreement that ensures compliance, payment, or performance of an act. It involves three parties:
- Principal: The party that purchases the bond and undertakes the obligation.
- Surety: The insurance company or surety company that guarantees the obligation will be performed.
- Obligee: The party that requires the bond, often a government entity or project owner.
How A Surety Bond Works
When a principal fails to meet their obligations under a contract, the surety company compensates the obligee for the losses incurred. However, unlike traditional insurance, the principal is legally obligated to reimburse the surety for any claims paid out. This makes surety bonds more like a form of credit than insurance.
Purpose of Surety Bonds
Surety bonds serve to protect the obligee from financial losses caused by the principal's failure to fulfill their obligations. They are commonly used in various scenarios, including:
- Construction Projects: Ensuring that contractors complete projects according to specifications and make required payments to subcontractors and suppliers.
- Licensing and Permits: Guaranteeing compliance with local, state, or federal regulations.
Types of Surety Bonds
- Contract Bonds: These guarantee that contractors will complete projects as per the contract terms.
- License and Permit Bonds: Required by government agencies to ensure compliance with regulations.
- Financial Guarantee Bonds: Ensure payment of taxes or other financial obligations.