Surety Bonds 101 – Basic Concepts, Definitions, Roles and Responsibilities
Thank you for enrolling in The Bond Agency’s entry level course in Surety Bonds. In 5 minutes, after reading this post, you will graduate with a grasp of all of the basic concepts of surety bonds including definitions for some complex terms, the role of the various parties and, more importantly what responsibilities you will be assuming when you obtain a bond. Tuition for this course is free, there is no exam but you will receive full credit from your new friends here at The Bond Agency.
Surety Bonds are not new. There is actually a rich history of the first surety bonds being used in ancient Mesopotamia, more than 4000 years ago, as referenced in the stone tablets of The Babylonian King Hammurabi. But all of that plus $3.50 will get you a Frappuccino at Starbucks, so enough of that… Here is all that you need to know:
WHAT IS A SURETY BOND? A Surety Bond is a three party agreement whereby one party (SURETY) makes a pledge or guarantee to another party (OBLIGEE) on behalf of a 3rd party (PRINCIPAL).
WHO ARE THE PARTIES TO A BOND?: Every Surety bond has three parties, and they are…
PRINCIPAL: The party for whom the guarantee or pledge is being made. Usually a contractor or business although can be an individual.
OBLIGEE: The party to whom the guarantee or pledge is being made. Often a Government Agency, Owner, or business entity. In a bonded construction contract, the Owner is the Obligee.
SURETY: The party making the pledge or guarantee to the OBLIGEE on behalf of the PRINCIPAL. In our agency the SURETY is always an A Rated Insurance Company.
WHY ARE BONDS REQUIRED?
A Surety Bond is usually required by law but often required by contract and provides a means by which the OBLIGEE can reduce or eliminate the risk of the PRINCIPALS failure to complete a project, pay a bill, obey a statue or honor a commitment. In our Agency the risk to an Obligee of a Principals failure is secured by an A Rated Insurance Company acting as Surety.
DIFFERENT TYPES OF BONDS
For our blog post about contract Bonds (Bid & Performance Bonds) click here
For information on License & Permit Bonds click here
To read our blog about Court Bonds click here
To read about Fidelity Bonds click here