Surety Bonds Definition Most Important in a Contract Following Surety Bonds: The key parties associated with a surety bond are the principal, an obligee, and a surety.
Principal
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Obligee
The obligee is one that requires a guarantee (contract) that the principal will be bound or obliged to keep within its obligations. The obligee requires the principal to buy the bond, which serves as safeguard for the obligee in the event that the principal fails to execute the contract. The obligee is most often a government agency or real estate owner.
Surety
Surety, or guarantor, issues the bond and guarantees that the obligations of the principal will be carried out. Under the assumption that the obligee does not meet this contract, the surety will pay for the debt. They are sort of like the middleman, working with the principal and the obligee.
All neatly bound up
In law, surety bonds virtually bind all three parties in a contract. In that manner, they assure the obligee that there is a principal where one can turn to in his or her time of need; usually abiding by laws defined in the contract. If principal fails to meet their obligation at some point, the surety comes in and covers the damage or loss.
How Surety Bonds Function
Surety bonds shield individuals and government institutions against financial losses caused by malpractice or prevarications. The surety will, on behalf of his principal, pay to the obligee and recover the same by suing the principal if he defaults his obligation.
An example is:
A patio contract is placed by a government agency (the obligee) with a contractor (the principal), who is then required to provide a performance bond. If the contractor defaults, the surety compensates the agency, and the contractor must pay the surety.
Who Needs a Surety Bond?
- Contractors, licensed professionals, and businesses working with government agencies.
- Different requirements for bonding according to industry, federal, state, and local law.
How Much Do Surety Bonds Cost?
The cost of a bond is dependent on the type of bond, amounts of the bond, and the risk assigned. Premiums range from 1-5% of the bond amount.
- Contractor License Bonds: 1-15% of bond amount
- Auto Dealer Bonds: 1-10% of bond amount
- Notary Bonds: $50-$150 per term
Cost is less at good credit score and financial stability. Comparing providers guarantees the best rates and terms.
