What happens when a large road contractor goes bankrupt, in the middle of a construction project? Who picks up the pieces and who pays to finish the job? Introducing, Surety Bonds!
Although surety is an ancient concept, its prime mission can be stated simply: performing a service for qualified individuals/companies whose affairs require a guarantor. In the United States, surety guarantees have been issued by corporations for over a century. These corporate sureties have the necessary capital to make numerous commitments in the form of surety bonds.
Because insurance companies issue many surety bonds, some people think that insurance and surety bonds are the same thing. While there are similarities, there are also major differences. A bond guarantees the performance of a contract or other obligation. Bonds are three party instruments by which one party guarantees or promises a second party the successful performance of a third party.
The Surety — is usually a corporation which determines if an applicant (principal) is qualified to be bonded for the performance of some act or service. If so, the surety issues the bond. If the bonded individual/company does not perform as promised, the surety performs the obligation or pays for any damages.
The Principal — is an individual, partnership or corporation who offers an action or service and is required to post a bond. Once bonded, the surety guarantees that he will perform as promised.
The Obligee — is an individual partnership, corporation or governmental entity which requires the guarantee that an action or service will be performed. If not properly performed, the surety pays the oblige for any damages or fulfills the obligations.
The purpose of a surety is to protect public and private interests against financial loss.