What is a surety bond?

The nuts and bolts of a surety bond is that it is a 3 party agreement.
The purpose of surety is to provide a financial guarantee to do (construction of a project) or not do something (Temporary Restraining Order). Most bonds are generated because there is a requirement or demand for one.

3 Party: The Principal, The Obligee and The Obligor
The principal is the person or entity in need of the bond. The obligee is the person or entity requiring the bond. The obligor is the person or entity guaranteeing the bond. In the world of surety the obligor is the surety company.

So what does a bond guarantee exactly?
For commercial bonds (License & Permit), it guarantees that a principal follows any rules and regulations outlined for their specific license. Examples of a license violation could include fraud, misrepresentation, or failing to provide a service. Failing to follow the laws, rules, and regulations can create a bond claim. When bond claims are made, the surety company expects to be reimbursed the amount of the claim plus expenses. This is a major difference in surety and insurance (see below).

In the construction industry, surety bonds typically ensure that a bonded contractor will fulfill their obligations specified in a signed contract. If a bonded contractor defaults on the contract, the surety guarantees that the obligee will be made whole. This can include either a financial payout or taking other actions to make sure the work is completed per the terms of the contract.

Is a surety bond insurance?
The short answer is no, it is not. The purpose of surety bonds is to protect the public. Most businesses have both surety and general liability insurance. If you have additional questions, don't hesitate to contact us. You can use the link below to do that.

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