Surety Bond Parties
Surety bonds provide an assurance that a party will meet the responsibilities it has agreed to perform to another party. They are distinct from insurance contracts in that insurance contracts involve only two parties—the insurance provider and the policyholder—while surety bonds involve three parties—the principal, the obligee, and the surety. This dissimilarity is what distinguishes surety bonds from insurance contracts.
While a surety bond is in place, the principal is essentially guaranteeing to the obligee that it will either pay for or execute the bonded duty. The surety, also known as the bond issuer, will evaluate the principal’s capacity to fulfill its commitments as stated, and if the principal fails to deliver, the surety will agree to reimburse the obligee for any financial loss that results.
The Surety
The company that is responsible for issuing the bond is referred to as the surety. At the beginning of the bonding process, the surety is responsible for acquiring a comprehensive knowledge of the principal’s enterprise from a variety of vantage points.
The surety is able to make an informed decision about the principal’s capacity to effectively carry out its responsibilities and fulfill its obligations under the contract by using this method.
The surety will normally have a staff on hand that has domain-specific knowledge in each sector for which it provides bonding services. As a result of possessing such particular expertise, the surety is in a position to rapidly evaluate the performance risk and prequalify the principal.
Keep in mind that when looking for surety bonds, businesses often go to sureties that have a local presence in the areas in which they operate. This makes it possible for the applicant for the surety bond and the bond itself or the principal to establish a lasting professional relationship.
The Principal
The business that supplies a client with products or services, or that manages or supervises projects for that customer is referred to as the principal. The principal is the party that is required to provide a guarantee to the obligee and whose performance is guaranteed by the surety. In addition to that, the surety would guarantee the subcontractor’s performance.
The principal then goes to the surety to request a bond that would ensure timely delivery and performance on the principal’s end of the agreement. Before issuing a performance bond of this kind, the surety does its due diligence on the principal by conducting an investigation into the company’s financial records, business references, track record, as well as reputation, amongst other aspects.
In the event that the principal does not carry out the services that were agreed upon in the contract and the obligee files a claim, the obligee is entitled to receive claim payments from the surety in order to finish the execution of the job in accordance with the requirements of the contract.
The Obligee
An obligee is often the owner of a company, the person in charge of a project, or a general contractor who needs guarantees that a subcontractor, supplier, or service provider will fulfill its responsibilities as outlined in a contract.
The obligee is the party who seeks the bond from the principal, and in the event that the principal is unable to fulfill its contractual commitments, the surety will provide the obligee with indemnification.