Sureties and Bonding: A Basic Primer

surety bonds

Understanding the basic concepts of sureties can be difficult, but it is important that contractors and small businesses obtain a working knowledge of state bonding regulations. Purchasing surety bonds is usually not an option but a legal obligation.

Three Parties: One Bond

A surety bond is an agreement between three parties. Such an arrangement guarantees that certain tasks will be performed and/or that terms of a contract will be honored.

The obligee is the party that demands that a bond be issued. Sometimes, the obligee is a state government regulatory agency that makes sure that businesses and industries meet compliance standards.

The principal is the business or contractor that purchases the bond as a guarantee that it will meet the standards demanded by the obligee.
The surety is an insurance company that provides backing in case the principal fails to uphold the terms of the contract or obligation.

Contract and Commercial Bonds

There are two chief kinds of surety bonds. Contract bonds typically are purchased by a contractor (the principal) for an owner or investor (the obligee) with whom the principal has entered into a contract. Commercial bonds are required for the issuance of licenses and provide security that the business or industry complies with code.

Surety bonds are an essential part of running a responsible business. Make sure you understand your obligations.