Surety Bonds are often confused with insurance. A Surety Bond is a three-party agreement whereby the surety guarantees to the obligee (party requiring the bond) that the principal (party that needs to be bonded) will follow the terms set forth in the language of the bond being required. In the event the principal does not comply with the terms of the bond and a claim is filed the Surety Company will investigate the claim and will pay the claim up to the maximum amount of the bond if the claim is found to be valid. However the Surety Company will then come back to the principal for full reimbursement. A Surety Bond is simply a temporary transfer of liability removing the risk of loss from the obligee and placing it on the Surety Company and the principal.
There are three main surety bond categories:
A contract bond is any bond that guarantees a specific contract. Contract bonds consist of bid bonds, performance & payment bonds, maintenance bonds, and subdivision bonds. These types of bonds are most often used in the construction industry.
Commercial bonds do not guarantee a specific contract. This type of bond is typically required by state or local regulations in order to obtain a license or a permit for a particular business.
Court bonds guarantee an appointed fiduciary will comply with terms set forth by a court order. Examples of court bonds are probate bonds, guardianship bonds, and appeal bonds.
Surety bonds that do not fall into one of the three main categories are known as miscellaneous bonds. These are bonds that do not guarantee a contract or compliance with license regulations.
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