The Contractor’s Essential Guide To Surety Bonds

Surety Bond

The surety bond is an item that has withstood the test of time and has been used, in one form or another, by contractors for several centuries.  While some may view the use of these bonds as an unnecessary company expense; other companies will view them as a “passport” allowing only qualified businesses to access bids on projects being completed.  The surety bond is most commonly used in the construction industry as they understand the necessity of bonds when seeking out public or private projects; however, bonds can be used in various types of industries.  Of course, to successfully implement a surety bond, it is necessary to have a full understanding of the item.  This article will provide information on all aspects of surety bonds.

What Is A Surety Bond Or Suretyship?

Suretyship can be described as a type of insurance; however, it is not insurance in the traditional sense as it is credit enclosed within a financial guarantee.  The purpose of suretyship or the surety bond is to ensure the Principal will perform all obligated tasks for the Obligee.  If, however, the Principal is unable to meet the obligations, the Surety will fill the shoes of the Principal and provide assistance.  The Surety will provide the Principal with financial indemnification; thus, allowing the completion of the obligated task.

The parties involved in the surety bond, as mentioned above, are the Principal, the Obligee, and the Surety.  The Principal refers to the party undertaking the obligation of the bond, such as a contractor in a project.  The Obligee refers to the party receiving the benefit of a bond, such as the client.  The Surety refers to the party issuing the surety bond that guarantees the obliged tasks will be performed, such as the insurance company.

What Is The Difference Between Surety Bonds And Insurance Policies?

Arguably the most distinguishing characteristic separating traditional insurance policies from suretyship is the Principal’s guarantee to the Surety.  A traditional insurance policy will see the policy holder paying a premium and receiving benefits for any claims covered in the package, subject to terms and conditions.  The circumstances, however, may involve an advancement of policy funds for claims that are deemed not covered; however, there is no recourse from the insurance company to recoup paid losses.

Another difference can be seen in loss estimation.  Traditional insurance policies require complex mathematical calculations to identify the projected losses on different insurance policies and plans.  The calculations include the probability of risk and loss across each class of business; thus, determining the most appropriate premium rates to charge for the specific class.  This will ensure that there is a sufficient premium paid to cover losses, pay for expenses, and receive a reasonable profit.

In contrast, surety companies underwrite risk with zero loss estimation.  The premiums paid are not fees to cover potential losses, but rather to obtain financial guarantee from the Surety should the Surety be required to assist a Principal.  The Surety will assume any risk of recouping payments made to the Obligee from the Principals obligation for Surety indemnity.

A final distinction between surety bonds and traditional insurance policies is that insurance policies are drafted by insurance companies and are often non-negotiable.  The surety bond, however, contains terms required by the Obligee and may be subject to negotiation between the various parties. More detailed information can be found here: