A Surety Bond is a three party contract whereby the surety company
provides assurance for the faithful performance of its principal
(aka-contractor).
Who are the Parties to a Surety Bond? There are three parties
to a surety bond: the surety, the principal and the obligee. The
surety guarantees that the obligations of the principal to the obligee
will be faithfully performed in accordance with a contract, statute
or regulations.
A surety bond is an instrument under which one party guarantees
to another that a third will perform a contract. Surety bonds used
in construction are called contract bonds. There are three types
of bonds used in construction. The bid bond protects the owner by
guaranteeing that the contractor will enter into the contract at
the determined price. The performance bond guarantees the performance
of the work on schedule and according to the plans and specifications.
The payment bond guarantees that certain workers, subcontractors,
and suppliers will be paid.
A surety bond is not an insurance policy. An insurance policy
assumes that there will be a loss, so the premium for an insurance
policy is calculated to cover losses that will occur. A bond, on
the other hand, is an extension of credit with the assumption that
the legal obligation will be fulfilled, and consequently, there
will be no loss. The bond premium paid to the surety covers only
the underwriting expenses of the surety company. When losses occur,
they have a significant impact on the surety company's financial
results.
For more information on this insurance, contact us.
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