The Surety Bond Definition

Small business principals, much like corporate CEOs, have numerous responsibilities such as crafting a business plan, creating sales forecasts, administering to legal issues, managing risk, obtaining appropriate business insurance, taking care of finances, accounting and taxes, managing personnel, and much more. And, many small businesses are, at some point, required to have a surety bond.

What is a Surety Bond?

A surety bond is a binding agreement between three parties. This agreement sets forth a financial guarantee by one party ( “surety” ) to another party ( “obligee” ) that a third party ( “principal” ) will fulfill required obligations to the obligee, and that state, federal, and local laws and applicable regulations will be adhered to. Let’s examine each of the three parties.

1. Principal

The principal is the first part of the surety bond definition. This is the business owner that is required to present the bond. This might involve a specific project (as is the case in contract surety bonds) or it might be a stipulation for doing business in a particular state (as is the case with commercial surety bonds).

2. Obligee (pronounced ob-li-jee)

This party, the second part of the surety bond definition, is the one requiring the surety bond to begin with. In the case of a construction project, this would be the project owner. For commercial bonds, this is typically a municipality such as state, county, city, with states being the most common type of obilgee in commercial surety bonds.

3. Surety

The surety is typically an insurance company that will issue the surety bond to the in exchange for a premium payment, which is much like a standard insurance premium. As the final element in the surety bond definition, They are most concerned with determining the risk associated with the surety bond agreement. The overall credit worthiness of the principal is one of the main factors they use when determining the risk, and thus the premium. Who Needs Surety Bonds?

While the most common form of surety bond is used for construction, there are numerous types of surety bonds available for a wide variety of business and industries such as medical suppliers, mortgage and insurance brokers, auto dealers, health club owners, Notaries Public and more. Surety bonds can be a critical part of the success of any business owner as they help protect public and private investments by providing a secure foundation.

Surety Bond Video

Important Surety Bond Definition Notice: Surety is Not Insurance!

Many people answer the question, “What is a surety bond?” with, “insurance.” A surety bond is not a form of insurance but rather a financial guarantee or form of credit. This is an important distinction in the definition of a surety bond. The specific type of surety bond is defined by what it guarantees, but essentially all bonds guarantee the fulfillment of a legal obligation between three parties and are designed to protect these parties from financial loss.

Additionally, businesses and industries purchase surety bonds to guarantee their customers are protected in the event of contractual problems or default. If a valid claim is made, the surety company will either reimburse the customer or make good on the contract.

Surety Bond Definition: External References

Merriam-Webster’s Surety Bond Definition page
Wikipedia’s Surety Bond Definition page
Travelers Insurance Surety Bond Definition page