What is a Surety Bond?

Think of surety bonds as written guarantees provided by two parties, the Principal and Surety,  to a third party, the obligee,  assuring that the Principal’s obligations will be fulfilled.

The three parties involved in surety bonds:

• The Principal – the  business or individual performing the obligation
• The Obligee – the party who is the beneficiary of the bond and to whom the principal is obligated to perform (often a government entity, project owner and the case of a subcontract bond, the general contractor)
• The Surety – the party who guarantees the principal’s obligation. Insurance companies are the best choice as a surety because they must meet and maintain financial strength criteria and are subject to strict regulatory supervision requiring proper performance.

Since surety bonds are usually written by insurance companies,  they are often confused with insurance policies creating the misconception that only a premium calculation is required in order to get a bond. The reality is that surety is a credit guarantee and more  similar to a banking transaction, than insurance. Depending on the type and size of bond, a surety underwriter must perform a level of due diligence (principal’s ability to perform) prior to issuing a bond. As in a defaulted bank loan, the principal on a surety bond is required to reimburse the surety for any losses.

The two main categories of surety bonds are contract bonds and commercial bonds, both  available in a variety of sub-categories and sizes to suit unique business types, various federal state and local laws and private owner’s requirements. Other types of  bonds include court bonds, which are generally classified as fiduciary (probate, executor, etc) or judicial (appeal, attachment, injunction, etc). Fidelity bonds (dishonesty insurance) although included under the bond category is actually an insurance product. For more information, please take a look at the types of bonds available through Surety Support Services, Inc. We’ve included an extensive list in our main menu, but as mentioned above, there is a bond to guarantee just about any kind of business transaction so it’s not practical to list every possibility.