What exactly does a Surety Bond do?
A surety bond is typically a three party contract between a (1) Principal (The person or company who purchases the bond, an (2) Obligee (The state agency or entity who requires the bond) and the (3) Surety Company. The surety bond guarantees that the principal will fulfill an obligation.
What types of obligations can be bonded?
Almost any type of obligation could potentially be bonded. However the most common types of bonded obligations include the performance of a service or duty (i.e. the completion of a construction project, etc...), compliance to state code, and /or payment of monies for a certain purpose.
Who can obtain a Surety Bond?
Any individual, partnership, corporation, or LLC can be bonded provided that they meet the underwriting requirements of the surety company.
Is a Surety Bond the same as insurance?
No, a surety bond is not insurance. Insurance is a two-party contract where the insured pays a premium to the Insurance Company, and the insured receives the benefit of the policy if a claim occurs. With a surety bond, the principal pays the premium on the bond, and if a claim arises, the principal also pays the loss. The principal pays for the loss on a bond because a claim only arises if the principal has failed or refuses to meet the requirements for which he was bonded.
With a bond, only the person or entity requiring the bond (obligee) can file a claim against the bond, and only the obligee receives the benefit of the guarantee should a claim arise.
What happens if a Surety Company has to pay a claim?
The person who is required to have the bond (principal) is legally obligated to reimburse the Surety Company for any losses incurred by the surety as the result of a claim. Because the bond is an extension of credit, the surety company has the same recourse against the principal as would any other creditor incurring a loss.