Surety Bond

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This should not be confused with a bond, which is very different. Because surety bonds exist to provide financial compensation, they might appear similar to insurance, but there are significant differences. Unlike an insurance policy, which is a twoway contract between the insurance company and the policyholder, a surety bond involves a three-way relationship between (1) the surety principal, (2) the surety company, and (3) the obligee. The surety bond, which is bought by the surety principal from the surety company, provides a financial guarantee that one party (the surety principal) will perform all the duties it says it will for another party (the obligee). If the duties are not performed by the surety principal as promised, then the obligee can make a claim against the surety company for compensation. Although the principal pays for the surety bond, the surety principal usually has no ability to make a claim on the surety bond. Furthermore, if the surety company has to pay a claim made by the obligee because the surety principal has not performed the duties required of it, the surety principal must reimburse the surety company for the claim it paid. This is yet another crucial difference from insurance, where the insurance company pays the loss but cannot obtain any reimbursement from the policyholder. Any reimbursement sought by the insurance company typically has to come from outside parties (see Subrogation). Surety bonds are an important part of daily life. Some types of surety bonds are bail bonds, which guarantee that the surety principal will show up in court at the proper time; permit bonds, which guarantee that the surety principal will comply with any applicable local codes; and contract bonds, which guarantee that a contractor will perform its duties under the contract in accordance with the contract plans.