What Are Surety Bonds?

Surety bonds can be described as promise insurance. A surety bond is a type of coverage that you take out on a contract so that, should you fail to meet your obligations, the client will be reimbursed by the person backing your promise.
There are three parties involved in a surety bond:

The Principal - This is most commonly going to be a contractor. Surety bonds can be purchased for any number of reasons, but it is usually going to be someone who has been contracted to perform a task. The principal is the one who is going to be buying the surety bond.
The Obligee - This is the client, or the person to whom the promise has been made. The obligee is the person who is going to be reimbursed should the principal fail to complete the task promised.
The Surety - Anyone with the capital to back a surety bond can be a surety, but the role is typically going to be held by an insurance company. The surety is the party collecting the premium from the principal and paying out reimbursement to the obligee should the contract not be fulfilled.

Premiums paid on a surety bond can vary wildly. A contractor with a particularly low credit score may be paying up to 15 percent of the contract's value for a surety bond, while one with excellent credit might pay as low as 1 percent.
Surety bonds cover contracts on multiple fronts. For instance, they can ensure payout to a contractor's employees should the lead contractor back out, so that the employees don't have to come to the client asking to be paid.
Surety bonds are most commonly associated with contract work, but they may also be used to back mortgage brokers, business services and any other promise-based services. Essentially: If Party A breaks a promise to Party B, Party C will reimburse Party B.

Posted 11:29 AM

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