What Are Surety Bonds?

 A surety bond is a guarantee agreement that is issued by an entity or an organization on behalf of a second party, where the entity provides assurance that the obligations made by the second party to a third party will be fulfilled by the entity, in case, the second party fails to fulfill them.


The entity is known as the guarantor and the second party is called as the principal. Third party is an obligee that's shielded by the bond and is the beneficiary of the obligation.


Surety bonds have been in existence from a long time. Hundreds of years ago, these bonds were used as a means of encouraging long distance trading. The first corporate surety firm in the US was established in the year 1880 and is known as the United States Fidelity and Casualty Company of New York. According to an estimate provided by the Surety and Fidelity Association of America, approximately $3.5 billion is paid annually towards the US surety premiums.


There are two important categories in these bonds that include contract bonds and commercial bonds. Contract bonds provide warranty on the terms and conditions in a specific contract. Some examples of contract surety bonds include performance, payment, bid, supply. A few examples of commercial bonds consist of beer permit.


Surety bonds are highly popular in the construction industry where these bonds are used by contractors in order to obtain the contract to construct a project. Usually, an insurance company acts as a guarantor and will take the place of the contractor. In case, the contractor defaults with the project or is unable to complete, the guarantor steps in to consider necessary corrective action so as to obtain the project completed. The insurance company might also be compelled to pay for the damages resulting due to default.


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