Surety bond definition: a legally binding contract that ensures obligations will be met between a principal (whoever needs the bond), an obligee (the one requiring the bond) and a surety (the insurance company guaranteeing the principal can fulfill the obligations).
Surety bonds are often misunderstood, as their purpose is different depending on which perspective you are coming from. They are part insurance, part credit and very confusing for most. If you read this article in full, you'll have an understanding of what bonding is and what risks they bring to your company and your personal assets.
What Does "Surety Bond" Mean? A Surety Definition Everyone Can Understand
The simplest way to define surety bond is insurance for them, paid and backed by you. Surety bonds are an insurance policy for the party requiring the bonds, called the obligee. In most instances, the obligee is a government agency and the bond is in place to protect the government and its citizens. The obligee requires the principal (you) to obtain and pay for the surety bond (performance bond costs are reimbursed when included in the bid). People will sometimes incorrectly refer to surety bonds as an “indemnity bond” (a specific type of bond related to loans) or a “security bond” (a mispronunciation of surety bond and not an actual bond type).
Surety Bonding Explained: How Does a Surety Bond Work?
"What's a Surety Bond?"
Surety bonds work as a form of insurance to the obligee, as they are the beneficiary that can file a claim if the bond's promise is not met. It is a form of credit to the principal, as claims must be re-paid by the principal to the surety.
When you’re required to get a surety bond you are expected to abide by the terms of the bond (if you don’t, claims occur). When it comes to surety bond claims, you are expected to pay every penny, plus legal costs. The bond is backed by the surety, but the surety will require an indemnity agreement (also known as a general agreement of indemnity) to be signed by your company and all owners personally. Indemnity agreements pledge your corporate and personal assets to reimburse the surety for any claim(s) and legal costs associated with them. Read our guide to learn more about how indemnity agreements work.