A surety bond is
a
contract
among at least three parties:
- The principal
- the primary party who will be
performing a contractual
obligation
- The obligee -
the party who is the recipient
of the obligation, and
- The
surety
- who ensures that the
principal's obligations will be
performed.
Through this
agreement, the surety agrees to
uphold
- for the benefit of the
obligee - the contractual
promises (obligations) made by
the principal if the principal
fails to uphold its promises to
the obligee. The contract is
formed so as to induce the
obligee to contract with the
principal, i.e., to demonstrate
the credibility of the
principal.
There are two
main categories of bond types:
contract bonds and commercial
bonds. Contract bonds guarantee
a specific contract. Examples
include performance, bid,
supply, maintenance and
subdivision bonds. Commercial
bonds guarantee per the terms of
the bond form. Examples include
license & permit, union bonds,
etc.
Suretyship bonds
originated hundreds of years ago
as a mechanism through which
trade over long distance could
be encouraged. They are
frequently used in the
construction
industry: in order to obtain a
contract to build the project,
the general contractor (and
often the sub-contractors as
well) must provide the owner a
bond for its performance of the
terms of the contract.
Conversely, owners and
contractors may also provide
payment bonds to ensure that
subcontractors and suppliers are
paid for work done.
|
Under the
Miller Act,
payment and performance bonds are required for
general contractors on all U.S. federal
government construction projects where the
contract price exceeds $100,000.00.
Surety bonds are also used in other situations, for example, to secure the proper performance of
fiduciary duties by persons in positions of private or public trust.
 A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the
premium charged is determined accordingly.
If the principal defaults and the surety turns out to be
insolvent, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an
insurance company whose solvency is verified by private audit, governmental regulation, or both.
The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.
A bail bond is a type of surety bond used to secure the release from custody of a person charged with a criminal offense. Under such a contract, the principal is the accused, the obligee is the government, and the surety is the
bail bondsman. |
