What is a surety bond?

Surety bonds are contracts involving at least three parties:

  • Principal – the primary party who will perform the contractual obligation
  • Obligee – the party who is the recipient of an obligation
  • Surety – the party who assures the obligee that the principal can perform the task

A traditional insurance policy is a two-party agreement where an insurance company collects premiums from their insured customers, while setting aside premiums to cover anticipated losses that will develop over time.  The surety relationship is a three-party contract where the surety company issues an extension of credit to the principal. The bond runs to the benefit of the obligee, as the surety will step in on behalf of the principal to ensure the obligation is satisfied.