What Is The Definition Of A Surety Bond

• A Principal -- This is the party that had initially promised to fulfill an obligation
• An Obligee -- This the beneficiary to whom a bond is issued and is the recipient of an obligation
• A Guarantor or Surety -- This is the party that issues the bond and ensures that the obligations promised by the principal are fulfilled

A surety bond can be defined as a contractual guarantee agreement where a guarantor issues a bond on behalf of the principal, stating a guarantee that the guarantor will fulfill the obligation that has been promised by the principal to the obligee if the principal fails to uphold its promises. In most cases, surety bonds are mostly issued by a bond or insurance company that acts as the guarantor. Obligations mentioned in a surety bond might involve meeting a contractual commitment, paying a debt or performing certain duties.

Surety bonds are slightly different from an insurance contract that is often issued by insurance companies. In case of an insurance contract or an insurance policy, premiums are determined anticipating the annual loss. However, a surety bond requires the guarantor to fulfill the guaranteed obligation without any loss.

Surety bonds are mostly used in the construction industry by the contractors. However, these bonds are also used in fulfilling a wide range of business, governmental as well as individual needs. While businesses require surety bonds either to reduce or transfer their business risk, government agencies prefer surety bonds so as to reduce public responsibility for the acts of others. Even courts have a requirement for surety bonds when they need to secure the responsibilities of the litigants that include the ability to pay for damages or child alimony.