Surety and Bonds

Surety is an age-old form of legal contract and has a well-documented history in commercial and personal transactions around the world.

A surety bond is a three-party agreement by which the surety binds itself to discharge the contracted obligations of a principal to an obligee in the event that the principal fails to fulfill such obligations. Insurers offer to companies a wide range of guarantees and bonding for national contracts or export. These services are mainly designed for building and engineering firms and industrial equipment suppliers.

The construction industry is the major user of contract surety bonds. They are required on most government projects and are frequently specified in the private and institutional sectors.

Contract surety bonds, through the surety company’s strength and rigorous pre-qualification procedures, provide security to owners, sub-contractors and others that a contractor will transform plans and specifications into a timely, successful and complete project.

In the construction industry, the surety is usually referred to as the bonding company or Surety Company. The oblige is usually the owner but also may be a general contractor or a major sub-trade contractor. The principal is usually a contractor.

What is Commercial Surety Bonding?

Commercial surety is comprised of the following major classes of bonds: customs and excise license and permit, fiduciary, lost document, and various special commercial bonds.

Commercial surety bonds have proven to be a cost effective method of ensuring compliance with a variety of important laws and regulations.

Most commercial surety bonds are mandated by government bodies and agencies (obligees) and specified in the requirements of various acts and regulations that pertain to particular business activities. Entities (principals) wishing to undertake such business are responsible to provide the required bonds. Certain private sector transactions also call for commercial surety bonds. The surety's obligation is limited to the bond penalty.

Surety vs. Insurance

A surety bond is a three-party agreement among a surety, and obligee, and a principal, whereas insurance is a two-party agreement between an insurer and an insured.

The price for a surety bond is calculated as a fee for a prequalification service and is related to the type and dollar value of the contract being guaranteed, whereas insurance policy premiums are based on the insurance company's statistical data which show that it will incur a certain number of claims for losses during the term of the policies.

In the event that a surety company is required to pay claims arising from a bond, the surety will expect to be fully reimbursed by the principal for such payment, whereas no such expectation or requirement exists when an insurer pays claims for insured losses.


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