As opposed to insurance, which is a two (2) party contract between an insurance company and the insured, a surety bond is a three (3) party agreement between a Principal, an Obligee, and a Surety. As a condition of being granted certain licenses, permits, contracts, or prior to assuming duty as a public official entrusted with funds, or a court appointed fiduciary, it is required by many state and local governments (as well as the Federal government in many cases) that the party assuming the responsibility (the Principal) provide the requiring governmental body (or private party in some instances) (the Obligee) with a guarantee that the Principal will perform all of the requirements of the code and/or contract and/or the governing document or in lieu thereof the party making the guarantee (the Surety) will either perform the obligation themselves or pay a stipulated sum of money.
A surety bond is an extension of credit in the form of a guarantee that provides protection to the party requiring the bond (the Obligee), but provides no insurance to the Principal.
Virtually any obligation or agreement that is not insurable or in violation of public policy can be bonded. The most commonly required types of surety bonds utilized by the public on a daily basis are:
- Permit Bonds - guarantee that a licensed party will comply with the code in a particular situation permitted by the local governing body.
- Public Official Bonds - guarantee that a person in a position of being an elected or appointed official will faithfully and honestly perform the required duties of the job according to law.
- Contract Bonds - guarantee that the contractor principal will perform the contract (building, road, sewer, materials supply, etc.) in accordance with the plans and specifications of the specific project and pay all required labor and material bills.
- Court Bonds - guarantee that the Principal will pay the court or some other Obligee a sum of money including costs and interest if they unsuccessfully appeal a money judgment; wrongfully attach or replieve property; wrongfully file a restraining order, or any other obligation required of a court.
- Probate Bonds - are filed in a Probate Court and are required in most states to protect and preserve the assets of an estate of a deceased, incompetent person, or minor. The court appointed guardian, executor, administrator, trustee, or similar person must post the bond with the court to guarantee their honesty and faithful compliance with the law as well as the terms of a will, trust agreement, or court order which stipulates the conduct required of them.
The Principal's failure to fulfill his obligation would create a claim against a Surety.
Usually only the holder of the bond (the Obligee) can make claim under the bond. The Principal can never make a claim.
A Principal is legally obligated to reimburse the Surety Company for any loss and expense incurred by the Surety. The Principal's obligation to the Surety can, therefore, be greater than the original obligation to the obligee. The Surety has the same recourse against the Principal as any other creditor would have in recovering their loss. This is the primary difference between a surety bond and insurance.
To the top »