Surety Bond Definition

sur•e•ty bond

A three-party agreement that legally binds together a principal who needs the bond, an obligee who requires the bond and a surety company that sells the bond. The bond guarantees the principal will act in accordance with certain laws. If the principal fails to perform in this manner, the bond will cover resulting damages or losses.

Although they often go unnoticed, surety bonds play a major role in countless industries across America. If you’re reading this article, you’ve probably heard about surety bonds but are still confused about their exact purpose. You’re not alone. Even those required by law to be bonded frequently misunderstand surety bonds.

So, how do surety bonds work?

Surety bonds provide financial guarantees that contracts and other business deals will be completed according to mutual terms. Surety bonds protect consumers and government entities from fraud and malpractice. When a principal breaks a bond’s terms, the harmed party can make a claim on the bond to recover losses.

Who’s involved in surety bonds?

Each surety bond that’s issued acts as a three-party contract.

  • The principal purchases the bond to guarantee the quality of work to be done in the future. This is usually a business owner or other professional.
  • The obligee requires the principal to purchase a bond to avoid potential financial loss. This is usually a government agency.
  • The surety issues the bond and financially guarantees the principal's capacity to perform a specific task. These are surety bond companies like

Which industries require surety bonds?

The construction industry makes up a huge part of the surety bond market, as contract bonds generate approximately two-thirds of total surety premium written. Commercial bonds deter service industry professionals and businesses from taking advantage of consumers. Most commercial bonds are required as a part of a state’s licensing process. Thousands of surety bond types are out there, but some of the most utilized surety bonds revolve around:

  • auctioneers
  • car dealerships
  • janitorial services
  • mortgage brokers

How do you know if you need a surety bond?

Before contacting a surety provider, professionals should check all federal, state and local regulations regarding surety bonds in their respective industries. Regulations regarding a specific surety bond in California will vary from those that apply to a surety bond in Texas. As surety bond regulations continue to increase across the board, agencies like have emerged to offer thorough and comprehensive bonding services.

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