Definition - What does Surety Bond mean?
A surety bond refers to a formal three-party agreement meant to guarantee the fulfillment of some task. It involves a surety, the company who backs the bond; the principal, the party who purchases a bond and must meet some contractual obligation; and the obligee; the party who requires a bond to enter in a contract with the principal. If the principal fails to complete the work, the obligee may file a claim to recuperate their losses.
Insuranceopedia explains Surety Bond
A surety bond acts as insurance for the obligee in case the principal does not uphold its contractual obligations. In helping affirm the principal's credibility and guarantee completion of the contracted task as per the agreement, it induces the obligee to arrange a contract with the principal. In exchange for the surety or bond company's backing, the principal pays a premium. In the event of a valid claim, the surety would pay the obligee up to the penal sum or penalty and then require the principal to reimburse them for the amount paid out alongside any incurred legal fees.
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