What About Surety Bonds?

Specifically meant for businesses in the construction industry, a surety bond is a written agreement that typically provides for monetary compensation in case the principal fails to perform the acts as promised. When people enter into a construction contract, often the main concern is whether or not the contractor is reliable, competent, and capable of doing all the work at hand. However, not many people think about the contractor’s financial strength. Even if they did think about it, it may not be that easy to obtain that particular information.

Hence, the surety bond was created in order to provide this financial assurance. There are several different types of surety bonds, but the two primary categories are contract and commercial surety bonds. They provide financial security as well as construction assurance on building and construction projects by guaranteeing project owners that contractors will perform the work and pay certain subcontractors, laborers, and material suppliers as necessary to complete the project. A surety bond also can help protect a business owner from liens against his or her property if one of their contractors fails to pay workers or suppliers.

A specialized line of business owners insurance, surety ship is created whenever one party guarantees performance of an obligation by another party. There are three parties to this specific agreement, which are the principal (the party that undertakes the obligation); the surety (who guarantees the obligation will be performed); and the obligee (the party that receives the benefit of the bond).

The Surety is typically always a company that is licensed by the Insurance Commissioner to write bonds. However, private persons can on some occasions also act as Surety. The contractor is referred to as the Principal because essentially the contract is his or her primary responsibility. Both the Surety and the Principal promise, in the bond, that the contract will be performed according to its terms. Basically, the Surety promises that if the contract is not performed, it will cover the damages if the Principal cannot.

The obligee benefits form the promise that is described in the bond. While the Surety and Principal both sign the bond, the Obligee does not. However, he or she has certain obligations under the bond, and if he or she does not perform them, neither the Principal nor the Surety is bound to the agreement.

The surety bond is not a business owners insurance policy. It simply provides an extra level of financial resource behind the contractor, as well as a place to turn to if the contractor is unable to meet the contractual obligations through his or her own assets.

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