Most people don’t think about surety bonds unless they are required to have one. At that point the question is asked; what is a surety bond? I will discuss what surety bonds are, the different types of bonds, and the uses of them.
First of all, please understand, we are referring to bonds in the insurance form not bonds in the investment form.
Surety bonds are similar to insurance but they are not insurance. Insurance transfers the risk from the insured or applicant to the insurance company, whereas, with bonds the risk stays with the insured. This is why bonds are generally cheaper than insurance. With a bond, you are getting a promise to pay from the bonding company. The bonding company or surety will pay when the insured does not but the bonding company will go after the insured to repay what is required of them. In essence the surety company is backing the customer’s promise to pay.
You will see the following terms on a regular basis when dealing with bonds.
Obligee- A person to whom another is obligated or bound. A person to whom a bond is given.
Obligor- A person who is bound to another. A person who gives a bond.
Surety- Security against loss or damage to the fulfillment of an obligation or the payment of a debt. A pledge, guarantee, or bond.
Surety Bond- A bond given to protect the recipient against loss in case the terms of a contract are not fulfilled. A bonding company assumes liability for nonperformance.
Principal- The applicant or the party with the promise to pay.
There are many different types of surety bonds but we will only focus on the most common forms.
A License and Permit Bond