A surety bond is defined as insurance among three parties which includes the obligee, the principal and the surety. The surety is usually the insurance company or an agent who upholds the bond for the benefit of the obligee. Usually the obligations are made by the principal- if the principal faults to withstand its promises to the obligee.
The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement.
The principal pays a premium (usually annually) in exchange for the surety company’s financial strength to extend surety credit.
Who pays the premium?
In the event of a claim, the surety will run scrutiny. If it turns out to be a genuine claim, the surety will reimburse and then turn to the principal for repayment of the amount paid on the claim and any legal fees incurred. In some cases, the principal has a cause of action against another party for the principal's loss, and the surety will have a right of subrogation "step into the shoes of" the principal and recover damages to make up for the payment to the principal.
Types of surety bonds-
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