Surety Bonds for Dummies In essence, a surety bond is a contract between three parties which is legally binding and is entered into by the three parties for the purpose of protecting one of the parties against poor performance or non-compliance by the other party.

How do surety bonds work?

How Do Surety Bonds Work? To put it simply, they guarantee that specific tasks are fulfilled. This is achieved by bringing three parties together in a mutual, legally binding contract. The principal is the individual or business that purchases the bond to guarantee future work performance.

What is a surety bond used for?

A contract surety bond is typically used to guarantee the performance of a contractor, who is the principal, for a construction contract. The contract surety bond protects the obligee, the project owner, from harmful business practices and failure of the contractor to finish or to properly complete the specified work.

Who is the principal in a surety bond?

This is achieved by bringing three parties together in a mutual, legally binding contract. The principal is the individual or business that purchases the bond to guarantee future work performance. The obligee is the entity that requires the bond. The surety is the insurance company that backs the bond.

Is it legal to use a surety bond?

A: You may be legally required to purchase a surety bond due to your job type or where you work. Many government entities mandate the use of surety bonds for certain industries as a preventative protective measure for consumer interests.

How are surety bonds used in the construction industry?

In the construction industry, surety bonds typically ensure that a bonded contractor will fulfill their obligations specified in a signed contract. If a bonded contractor defaults on the contract, the surety guarantees that the obligee will be made whole.

Who is liable for the loss of a surety bond?

If the principal fails to perform the act as promised, the surety is contractually liable for losses sustained. Obligee (pronounced ob-li- jee) – the party who requires and often timers receives the benefit of the surety bond. For most surety bonds, the obligee is a local, state or federal government organization.