A surety bond is a contract between three parties: the principal (you), the surety (insurance company) and the obligee (the entity requiring the bond); in which the surety financially guarantees to an obligee that the principal will act in accordance with the terms established by the bond.
Surety bonds guarantee that specific obligations are fulfilled. This is achieved by bringing three parties together in a mutual, legally binding contract.
1. The principal is the individual or business that purchases the bond to guarantee future work performance/obligation.
2. The obligee is the entity that requires the bond. Obligees are typically government agencies working to regulate industries and reduce the likelihood of financial loss.
3. The surety is the insurance company that backs the bond. The surety provides a line of credit in case the principal fails to fulfill the obligation.
The obligee can make a claim to recover losses if the principal fails to fulfill the obligation. If the claim is valid, the insurance company will pay reparation that cannot exceed the bond amount. The underwriters will then expect the principal to reimburse them for any claims paid.
Surety bonds are typically construction bonds, license and permit bonds, probate bonds, public official bonds, court bonds, and other miscellaneous bonds.