Surety Bond

What Does Surety Bond Mean?

A surety bond is a formal three-party agreement designed to guarantee the completion of a specific task. It involves the surety, the company backing the bond; the principal, the party purchasing the bond and responsible for fulfilling a contractual obligation; and the obligee, the party requiring the bond to enter into a contract with the principal. If the principal fails to complete the work, the obligee can file a claim to recover their losses.

Many states and municipalities require contractors and certain other licensed businesses to post a surety bond before they can legally operate, which is why bonds often come up alongside other coverages on a typical small business insurance bill.

Insuranceopedia Explains Surety Bond

A surety bond serves as insurance for the obligee in case the principal fails to fulfill its contractual obligations. By assuring the principal’s credibility and guaranteeing the completion of the contracted task as per the agreement, it encourages the obligee to enter into a contract with the principal. In return for the surety or bond company’s backing, the principal pays a premium. If a valid claim is made, the surety will pay the obligee up to the penal sum or penalty and then require the principal to reimburse the amount paid, along with any legal fees incurred.

It’s worth noting that a surety bond is not the same thing as a liability policy. A bond protects the obligee if the principal doesn’t deliver, while general liability insurance protects the business itself from third-party injury and property damage claims. Most contractors carry both, since project owners typically ask for a bond and proof of liability coverage before signing a contract, and the cost of a bond is often factored into the overall price of general contractor insurance.