Surety Bonds


Surety bonds are responsible for fuelling today's business world. Contracts that are issued across many different industries are often secured by the issuing of surety bonds. Without these bonds, customers would not be able to have a guarantee for the proper delivery of goods and services. In addition, states would not be able to regulate the activities of licensees and other businesses operating within their jurisdiction.

Surety bonds are commonly issued in the licensing, construction, motor vehicle, and other related industries. They ensure safe, quality and reliable services to customers, as well as compliance of businesses to the rules and regulations set forth by various states.

Understanding how surety bonds work can be complicated. It is therefore important to get a grasp of what surety bonds are, how they work, and how they are issued.

What are surety bonds?

In the simplest terms, a surety bond is a contract that is signed among three parties- the principal, the obligee, and the surety. The obligee is the person/business that is seeking a particular service, while the principal is the entity (often a business) that is providing that service.

When an obligee seeks the services of a principal and negotiates a contract with them, they may need to have some sort of assurance that the principal will deliver the services as promised. This is especially important in industries such as construction, where the owner of a project has a lot at stake when they seek out a contractor to complete a project. If a contractor does a poor job on the site or causes damages to the property of the project owner (the obligee), the obligee faces high financial risk as a result.

A surety bond is therefore issued by the contractor (who is the principal in this case) in order to ensure compensation to the obligee for any breaches of the negotiated contract.

The surety bond therefore acts as a safety net for the obligee in case things go wrong during the project. The third party that is involved is the surety. The surety is basically an insurance company that provides surety bonds to principals at a fee. The surety agrees to pay any valid claims that are made by the obligee, after which the principal will compensate the surety at a later date. The two parties agree on the terms of payment, premiums, eligibility, etc.

The dual role of surety bonds

Surety bonds serve two important functions. They serve as an insurance policy for the obligee against damages incurred, and an extension of credit to the principal when a claim is made against them. In some cases, when businesses that are licensed by the state fail to adhere to the established guidelines, they may have a claim made against their surety bond by the state for any damages that they caused.


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