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-
- Court surety bond- This type of bond protects one from loss incurred while facing court proceedings and therefore, are required before court proceeding.
- Fidelity surety bond- This type of bond is usually required by companies, organizations to protect themselves from employee theft and dishonest actions. Hence, they are part of organizations business risk management.
- Commercial surety bond-These types of bonds are in favor of the general public and are compulsory in specific government agencies. For instance, the liquor industry or businesses with a license.
- Contract surety bond- This type of bonds are used in construction industry to ensure that the construction contract will be fulfilled according to the terms and conditions. Usually this type of bond has two bonds, one to ensure performance and one to ensure payment.
