For many people, surety bonds are shrouded in mystery. In this post we talk about what a surety bond is and discuss some of the different types of surety bonds. Moreover, we define some of the applicable terms, such as “principal,” “obligee,” and “surety.”
What Is a Surety Bond?
A surety bond represents a kind of risk management.
To give an example, let’s say that a small city wants to hire a contractor to make repairs on a municipal building. In order to mitigate the risk they’re taking, the city requires the contractor to take out a surety bond. The contractor applies to a surety company for that bond.
The surety company, in turn, checks out the contractor’s credit history and the financial soundness of his or her business. They might even go so far as to check with the contractor’s former clients. That’s because they will want to make sure that this contractor can be counted on do what the city needs him to do.
If the contractor’s business checks out well, the surety company issues the surety bond. In other words, they assure the city that the job will get done properly, within budget and on time. If the contractor fails to make that happen, the surety company will pay the city a certain amount, up to the limit of the surety bond.
In this example, in the lingo of the surety bond business, the surety company is the “surety.” The city is the “obligee,” and the contractor is the “principal.”
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