What is the Definition of a Surety Bond?
The definition of a surety bond is straightforward. It is a three-party contract where party A (the surety) guarantees that party B (the principal - the company/person that needs a bond, such as a general contractor) will perform according to the terms of the agreement that is put forth by Party C (the Obligee). The bond is a guarantee that the principal performs according to the terms of the contract or pursuant to laws or regulations (if the Obligee is the government) will act in accordance with certain laws. If the principal does not perform then the Obligee can make a claim on the bond and the surety will pay the Obligee directly.
What are Surety Bonds Used For?
Surety bonds are used for several categories. The first kind is for licenses and permits. These are bonds that the government requires for companies to get in order to ensure that the government gets paid taxes. The second kind is for a contract, such as building a shopping mall. The third major kind is for court, such as when a probate action is filed.
What Is Surety?
Surety is the guarantee of the debts of one party by another. The surety is typically the party that guarantees the payment or performance of another party. In the United States, this is typically a large insurance company, although it can be a private party.
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A surety bond is not the same thing as getting an insurance policy. In insurance, the risk is assumed by the insurance company. However, in surety, the surety expects reimbursement when a claim is paid. The goal is to make the Obligee whole and not to shift the risk in the transaction.
Definition of a Surety Company
The definition of a surety bond company is an entity that provides surety (or a guarantee) on behalf of another group. This type of bond is usually called a performance bond, or even sometimes a performance and payment bond.
Surety bond in construction
Most surety bonds are used in construction and are called Performance and Payment Bonds. The performance bond makes sure that the Obligor (that is, the party getting bonded) will perform the terms of an underlying agreement, such as a contract to build a building, pursuant to the terms of that underlying agreement. If the Obligor does not perform according to those terms, then the Obligee (the owner of the property) will then make a claim against the bond. If the claim is valid, then the surety will either find another contractor to finish or fix the job, or will pay damages to the Obligee.
A payment bond is just a bond that helps make sure that there are no liens put against the property. What this bond does is provide assurance that all subcontractors are paid by the Obligor and that all materials are paid for as well.
What is a Security Bond?
The security bond is a specialized type of surety bond and can provide a significant amount of benefit to the owner of a project. The benefit is that the project will not be held up in litigation, but instead can move forward. All federal jobs are required to have a surety bond pursuant to the Miller Act. Most states and municipalities have passed similar laws and regulations, known collectively as little miller acts.
How long is a surety bond good for?
For a contract surety bond, the surety bond lasts until the contract is completed (plus some time for any maintenance period on the contract). For court bonds, they last until the court matter is concluded. For most permit and license bonds, they last a year.
Types of surety bonds
There are thousands of different types of surety bonds. See our page here for only a few of the ones that are offered.
Definition of a Security Bond
The Security Bond Definition is a surety bond that is secured by some sort of collateral. In many surety bond cases, there is not any collateral required. Thus, the surety will simply issue the bond, like a performance bond or payment bond, based on the financial standing of the underlying entity being bonded. However, in a security bond, there is collateral that is required. This collateral cannot be part of the job that makes up the contract underlying the performance and payment bond. Instead, there is required additional collateral, or "security," and this collateral is what is being held.
Some sureties ask for an irrevocable letter of credit. This is purely liquid security for the underlying bond. In addition, some sureties will want funds control so that they can write the underlying performance bond.