What is a Surety Bond?
A surety bond is a contract between three parties:
- Surety - the party that assures the obligee that the principal can perform the contractual obligation
- Principal - the primary party that is going to perform the contractual obligation
- Obligee - the party that is the recipient of the contractual obligation (i.e. the entity requiring the bond)
Why Do I Need A Surety Bond?
Surety bonds protect the public against accidental loss and liability. You may need a surety bond because an obligee requires one to fulfill contractual obligations, abide by laws or ordinances, and/or to satisfy court orders.
Is A Bond a Type of Insurance?
Surety bonds are very different from insurance. The beneficiary of the bond is a third party, the obligee. If the principal cannot, or will not, perform their obligations, then the surety company steps in to "make good" on the principal's obligation. The principal is then responsible for reimbursing the surety for any claims or expenses that the surety incurs to meet those obligations.
What Information Is Needed to Write a Bond?
The necessary amount of information depends on the type and size of the request. Some surety bonds require a great deal of paperwork, including supplying:
- Three years of business and ownership financial information
- Work-in-progress reports
- Bank reference letters
- Completed application and
- Resumes of key employees
Other surety bonds may only require a completed application and a detailed credit check on the business and all owners. All surety companies require that an Indemnification Agreement be signed stating the principal is aware of, and agrees to, the financial obligations associated with bonding.