How Surety Bonds Work

A surety bond secures the fulfilment of contractual, commercial or legal obligations. This approach is different from a traditional insurance contract in that the guarantor holds recourse rights against the bonded or guaranteed company and can recover any payment made under the bond from that company.

An increasing proportion of public and private contracts today require security, such as a surety bond or guarantee, for contractual obligations. The regular need for these products reduces the availability of bank credit lines and impacts the financial flexibility required for working capital purposes and to finance investments.

There are three parties involved in a surety bond: the principal, the obligee, and the surety.

• The principal purchases the surety bond. This guarantees the quality and completion of the contracted work
• The obligee is the entity who requires the principal to purchase the bond
• The surety is the entity that issues the bond and financially guarantees the principal’s ability to complete the contracted work
• If the principal does not complete the work as contracted, the obligee can make a claim for payment from the bond. The principal is then obligated to pay back the claimed amount to the surety