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Surety Bonds |
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Getting Started: Contact Us if you're interested in obtaining a Surety Bond/a> |
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When a first party (obligee) calls upon a second party (principal) to perform duties in contract form, a surety bond is issued by a third party (surety), guaranteeing that the second party will fulfill an obligation or series of obligations to the first party. In the event that the obligations are not met, the first party will recover its losses via the bond. |
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Through a surety bond, the surety agrees to uphold — for the benefit of
the obligee — the contractual promises (obligations) made by the
principal if the principal fails to uphold 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 will pay a premium (usually annually) in exchange for
the bonding company's financial strength to extend surety credit. In the
event of a claim, the surety will investigate it. If it turns out to be
a valid claim, the surety will pay it and then turn to the principal for
reimbursement of the amount paid on the claim and any legal fees
incurred.
If the principal defaults and the surety turns out to be insolvent, the
purpose of the bond is rendered nugatory. Thus, the surety on a bond is
usually an insurance company whose solvency is verified by private
audit, governmental regulation, or both.
A key term in nearly every surety bond is the penal sum. This is a
specified amount of money which is the maximum amount that the surety
will be required to pay in the event of the principal's default. This
allows the surety to assess the risk involved in giving the bond; the
premium charged is determined accordingly.
Surety bonds are also used in other situations, for example, to secure
the proper performance of fiduciary duties by persons in positions of
private or public trust.
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