What Is a Surety Bond?

 

The financial instrument surety, also known as a guarantor, is a guarantee that someone will perform an act. This financial instrument is used for a variety of purposes, including loan guaranteeing and business liability insurance. It provides a guarantee of a specified amount of money, usually in exchange for a percentage of the agreed-upon amount. It is an important tool in many industries, but you should understand how it works before you use it.

The principal purchases the bond as a guarantee that the contractor will complete the work, and the bond amount is usually determined by the project owner and surety before the contract is signed. After signing the three-party agreement, the surety and principal must fulfill their obligations. The surety will also sign an indemnity agreement that protects it from the risks that the principal may incur if the project does not meet expectations. As such, a bond is an important tool to help reduce risk on a project.

A surety bond is similar to an insurance policy, but it is different. It protects the obligee, usually the government, by ensuring that the principal will perform their obligations. If a principal does not fulfill his obligations, the surety company will investigate and may be entitled to recover losses incurred. In this case, the principal may be required to pay the company’s expenses in order to resolve the situation. This bond is also important because it protects the obligee from losing money.