What is a surety bond?

 October 22, 2019     UFG Insurance    Surety 

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“They call me bond, surety bond.”

There’s no villain, secret lairs or European sports cars here – we’re talking surety bonds. More specifically, what is a surety bond? 

A surety bond is a contract that expresses one party’s promise to answer for another party’s failure to do something as promised.

There are three parties that make up a surety bond contract. The surety (UFG Surety, for example) guarantees the performance and responsibility of a second party (the principal) to a third party (the obligee).

Let’s talk more about the three parties that make up a surety bond and their responsibilities.

1. The principal

The principal, or contractor in most cases, purchases the bond to guarantee the project work described in the contract, permit, or law. The principal is responsible for confirming the exact bond amount needed before applying for a bond. They must fulfill their obligation to deliver the services in the three-party agreement. They must also sign an indemnity agreement with the surety. If the principal fails to meet their obligation, the surety company either pays to complete the work or compensates the owner of the project for financial loss. Surety companies require the principal to sign an indemnity agreement because they expect to suffer no loss on a surety bond issued. If the principal does not fulfill their obligation to the obligee, they must reimburse the surety for any losses suffered on their behalf.

REAL LIFE EXAMPLE:

Bill is a contractor/business owner who wants to pursue a contract to renovate a public health building. As a contractor, Bill needs various contract surety bonds to get the business. According to law, the city government requires bid, performance and payment bonds. Bill needs to find an agent and from there will work with a bond producer, and a surety, to get bonded for the project.

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2. The surety

The surety, otherwise known as the insurance company providing the bond, guarantees to the obligee that the principal will fulfill an obligation or perform as required by the underlying contract. A surety company, like UFG Surety, focuses on helping contractors and other business owners get bonded. As a standard business practice, sureties only bond contractors and companies in which they feel confident. A variety of documents must be submitted to the surety in order for them to perform their analysis. Generally, most submissions include current and historical financial statements, loan agreements, job schedules, certificates of insurance and a completed company questionnaire.

3. The obligee (or entity requiring the bond)

In the bonding process, the project owner, or obligee, receives the surety’s guarantee that a contractor (principal) will fulfill an agreement or contract. In most cases, the obligee is an organization that requires a bond, such as the government. Governments require a surety bond in order to reduce overall risk in the project. As the beneficiary of the contract, the obligee pays the principal upon fulfillment of the terms. 

Well, there you have it! Surety bonds are not that difficult to understand after all.

Just don’t ask about shaken or stirred bonds.

Are you interested in learning more about UFG Surety? With nearly 70 years of experience, UFG Surety’s team of responsive, trusted and knowledgeable associates are ready to help you succeed and achieve your business goals.

Ready to chat with an agent? Find a surety agent today.  

 


The information provided is for informational purposes only. Every attempt is made to ensure that the information is accurate; however, it is not intended to replace professional advice. For more information, see Disclaimers & Other Legal Documents.