Surety Bond Key Terms

Understand important surety bond key terms for a well-rounded knowledge of surety bonds

By Angela King, Freelance Writer

A surety bond is used within a legal agreement or contract to ensure that a contract is fulfilled in accordance to the agreement. Three parties—the principal, the obligee and the surety—form a contractual agreement that ensures that the obligee receives services, products or finances from the principal. If the principal defaults, the surety is liable to the obligee. From corporate to individual surety bonds, learn important surety bond key terms to ensure you understand how they work.

Surety

Within a legal agreement among three entities, the surety is the party responsible for a debt payment when another party defaults. A surety is generally part of an insurance company and works with companies that request third-party debt payment assurance.
Try: Find more information on sureties supplied by the Surety Information Office.

Contract bonds

Contract bonds are used in the construction industry and generally on public bids. A contract bond holds the surety responsible to pay or perform services if the obligated, bonded party fails to deliver the goods, services or payments promised in the contract. Bid, performance and environmental surety bonds are all types of contract bonds.
Try: Zurich, a provider of surety bonds, offers further information on the types of contract bonds available.

Surety bond guarantee program

The surety bond guarantee program was established to ensure that small business contractors could afford surety bonds to compete in bids for projects against larger, more established companies. The program involves a guarantee by the US Small Business Administration to support the surety against major losses.
Try: The US Small Business Association offers extensive information on the surety bond guarantee program.

Surety bond consultant

A surety bond consultant works with the surety to handle surety bond claims and arbitrate contract disputes when needed. Surety bond consultants generally have a well-rounded background that includes legal, construction and finance expertise.
Try: Hays, a risk management and commercial insurance company, offers further information on the services provided by surety bond consultants.

Surety bond obligee

A surety bond obligee is the party in the three-party contract that requests a surety bond for a specific job or service. The surety bond obligee is protected with the surety bond in case the surety bond principal-the party responsible for delivering a good or service-defaults on the agreement. If the surety bond obligee defaults on the agreement, the principal party and the surety are freed from obligations stated in the contract.
Try: Find out more about surety bond obligees making up the surety staff at Surety Bond Associates.

Corporate vs. individual sureties

Corporate sureties are sureties that are not fully guaranteed. Corporate surety companies usually present financial statements to show financial responsibility, but the corporate surety company is not legally required to offer specific information to guarantee a bond. Most large-scale jobs and federal jobs use corporate sureties. Individual surety companies offer 100-percent guarantees on the sureties they provide and must offer specific assets to prove financial responsibility on each surety bond offered.
Try: Learn more about corporate and individual sureties at IBCS.