Surety

Also sometimes called a performance bond, security bond or payment bond, a surety bond acts as a promise of performance or payment if a business fails to fulfill its obligation. It is a legally binding contract between three parties: 

1. Principal: purchases bond to guarantee work performed. The principal is responsible for fulfilling the obligation and if unable to perform, they must pay monetary damages to the obligee. 
2. Surety: insurance company providing the bond. The surety promises the fulfillment of the principal’s obligation to the obligee. In the event of the principal’s failure to fulfill the obligation, the surety is obligated to complete the work or compensate the project owner for financial loss.
3. Obligee: the entity requiring the bond, such as governments attempting to reduce the risk of financial loss. The obligee is the party to whom the principal owes the obligation and is the beneficiary of the agreement. The obligee is responsible for payment to principal upon fulfillment of terms in the contract. 
   

• Government projects (federal, state or local) require surety bonds as a means to manage the risk involved with construction projects.
• Owners of private projects may require surety bonds.
• Contractors may also require that subcontractors working on a project obtain bonds.
  

While you may hear the terms “surety insurance” or “surety bond insurance,” surety bonds technically differ from insurance in many ways. 

• Insurance protects the person who buys the insurance.
• Surety bonds protect the obligee (the person who requires the bond).
• Surety Bonds are a non-traditional insurance product.
• Surety bonds are similar to bank credit.
• Surety provides assurance contractor can complete project and pay bills.
  

A contract surety bond is required when a contractor bids— or as a condition of a contract award—on any federal construction contract valued at $150,000 or more. State and municipal governments typically have similar requirements. Private owners may also opt to require a contract surety bond for a project. 

A commercial surety bond covers a wide range of bond types and may be required for businesses and individuals by federal, state and local governments, or through various regulations, ordinances, entities or statutes.