WHAT IS A SURETY BOND?
A surety bond is a specific type of bond which involves three different parties. The first party is the Principal, the person or organization who is being secured against default. The second party is the Obligee, the person or organization who is owed money or labor. The third party is the surety, the person or organization who is promising to pay a certain amount should the principal default.
- The Obligee – The owner of the contract in which the bond is written in favour of
- The Principal – The contractor or party fulfilling the contract or obligation
- The Surety provides The assurance to the obligee that the principal will fulfill all obligations pertaining to the contract or obligation
A surety bond guarantees the Principal will fulfill all requirements of the contract they agreed to between the Obligee and themselves. The surety provides the bond between the obligee and the principal. If the Principal doesn’t meet the obligation in a satisfactory manner, the surety will meet the obligation and seek damage from the Principal.
IS SURETY A FORM OF INSURANCE?
Surety is not the same as insurance. Surety is a three party agreement that involves a pledge by the surety to another party (obligee) that the third party (principal) will fulfill the contractual obligations of the agreement.
An insurance policy is a two party agreement between the insurer and the insured that results in a reimbursement being paid to the insured due to loss by a designated cause defined by the insurer.
An insurance policy premium is calculated by cost averages based on the insurance company’s statistical data which estimates how often 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 under the Indemnity Agreement for such payment, whereas no such expectation or requirement exists when an insurer pays claims for insured losses.
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