Surety Bonds are best described as a financial guarantee backed by a third party, the Bond company, also known as the Surety. Bonds are written in favor of the organization requiring the Bond, known as the Obligee, and will have a specific dollar amount and a specified period of time. A bond claim arises if the person or organization contracted to perform the job, known as the Principal, fails to do so as agreed and is subsequently unable to make financial restitution to the Obligee. In that case, the Surety company will make financial restitution to the Obligee up to the Bond limit.
Are Surety Bonds Insurance
Surety Bonds are often confused with insurance when, in fact, they are significantly different. Although insurance and bonds are both a financial guarantee backed by a third party, the Surety company, unlike an insurance company, has the right to recover from the Principal any losses paid to the Obligee.
There are many types of Bonds available, but the most common types are Contract, License, and Permit Bonds.