Home > Insurance Services > Business Insurance > Surety Bonds

Surety Bonds

Surety bonds are required in practically every profession in the U.S. There are many different types of surety bonds, but all are essentially an agreement between three parties:

Principal: the person required to post a bond;
Obligee: the person or entity requiring the principal to be bonded; and
Surety: the institution providing a financial guarantee to the obligee on behalf of the principal.

If the principal fails to meet his or her obligations to the obligee – which could mean anything from complying with certain laws and regulations pertaining to a business license to meeting the terms of a specific contract – the surety may have to pay a claim to the obligee. A surety bond is a risk transfer mechanism and a legally binding contract.

Benefits of Surety Bonds

Surety bonds are purchased by a principal because they are required, either by a government

entity or as a condition of a contract. However, these bonds provide benefits for the principal as well. They are a cost-effective alternative to posting cash directly with a trustee or the obligee or providing an irrevocable Letter of Credit in lieu of a surety bond.

As the principal, you pay a small percentage of the bond amount to the bonding company (surety) to provide a guarantee to the obligee, rather than parting with your liquid cash. Basically, when you purchase a surety bond, it is a form of credit extended to you.

The cost of a surety bond is based on three factors: