If you are wondering WHAT a Surety Bond is, WHO are involved in it, and HOW they work,
then you’re at the right place!
So what is a Surety Bond?
Surety Bond, in its simplest sense, is a promise by a surety that a specific task is completed
to the terms of a contract or in line with laws and regulations.
Who requires a Surety Bond?
Most often, surety bonds are required by a government agency, regulation department,
state or federal court, or general contractor as a form of protection.
It also serves as a form of protection for consumers.
Who are the parties involved in obtaining a surety bond?
What makes surety bonds unique is that they always have 3 Parties, specifically:
The Obligee; The Principal;
1st Party: The Obligee.
The Obligee is the person or company requiring the bond.
It is also the entity that is protected by the bond.
2nd Party: The Principal.
The Principal is the person or company purchasing the bond and promising to adhere to the terms
of the bond.
Usually, the Principal must perform a task OR refrain from doing a certain activity.
3rd Party: The Surety.
The Surety Company is issuing and backing the bond for the principal and guaranteeing
indemnification to the obligee if a claim is made.
Simply put, the Surety guarantees to the obligee that the principal can perform the task.
Now let’s go to how Surety Bonds work with all the parties involved.
Here’s an example from the Construction Industry:
A Local USA Authority wants to construct an office building and hires ABC Contractor for
ABC Contractor is required by the Local USA Authority to secure a Construction Performance
Bond to guarantee they will fulfill the terms of the contract.
ABC Contractor will buy a Construction Performance Bond from a reliable and trusted Surety Company.
Basically, the surety bond protects Local USA Authority by guaranteeing the performance
by ABC Contractor to fulfill the obligation according to the agreement.
Let’s say that ABC Contractor goes bankrupt and can’t fulfil their obligations according
to the contract, then the Surety must step in to indemnify Local USA Authority.
Still sound Gibberish?
Here’s another example:
A house and lot property and some financial assets were left by a deceased parent and
were willed to his children who are still minors.
The court may then require that a Guardianship Bond be secured by a selected guardian.
This bond is to ensure that the appointed guardian acts at the best interest to the
person whom they have guardianship.
The court will appoint a guardian after evidences prove that the beneficiary or ward is not
capable of making well-informed decisions on their behalf.
They will manage or care for any property or financial assets left by the deceased willed
to minors or given to people who are incapacitated.
If the guardian abuses or mismanages the finances of the other person, then a claim will be
filed against that bond.
It is a way to financially protect the ward if anything happens because of the actions
of the guardian.
Therefore, the guardian, by securing a guardianship bond, assures the court that they are highly
capable of exercising proper conduct in the legal custody of their beneficiary’s belongings
Simply put, the surety bond is used as a guarantee that the principal will get the job done according
to the terms of a contract.
If ever the Obligee feels that the terms of a contract were not fulfilled or if a business
is found to be in breach of the laws that regulate their business, a claim can be made
against the surety bond.
If the surety finds that the claim is valid, the surety will indemnify the obligee, and
the principal is responsible for reimbursing the surety for the claim and any legal costs.
Therefore, the surety sits in the middle – offering a guarantee of payment to one party and collecting
the payment (if a claim is made) from the other party.
When the principal purchases a surety bond, they are buying a line of credit.
The surety is simply saying, “They’re good for it.”
Still not sure what type of Bond you need?
Still have questions in mind?
Let Surety Bond Authority help you decide on a specific bond type.
Visit our website or call us to talk with a Surety Bond Authority Expert.
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