A Surety Bond is a contract among at least three parties:
The principal – the primary party who will be performing a contractual obligation
The obligee – the party who is the recipient of the obligation, and
The surety – who ensures that the principal’s obligations will be performed.
The Surety pays out cash to the limit of the guarantee in the event of a default by the Principal to uphold the Principal’s obligation to the Obligee.
Generally, surety bonds are classified as Contract, Commercial or Fidelity.
Contract Bonds are used frequently in the construction industry as a guarantee from a Surety to a project’s owner (Obligee) that a general contractor (Principal) will adhere to the provision of the terms of the contract. Examples of these types of bonds include bid bonds (guarantee that a contractor will enter into a contract), payment bond (guarantee that a contractor will pay for services and materials), performance bonds (guarantee that a contractor will provide facility repair and upkeep for a specified period of time).
Commercial, License, or Permit Bonds (usually required by law), are guarantees from a Surety to a government and it’s constituents (Obligee) tha a company (Principal) will adhere to the provisions of applicable codes and laws that apply to particular activities. License and permit bonds are a general class of surety bonds required of a person or entity to obtain a license or a permit in any city, county, or state. These bonds guarantee whatever the underlying statue, state law, municipal ordinance, or regulation requires.
Indemnifies the insured for losses caused by the dishonest and fraudulent acts of it’s covered employees. In addition, a fidelity bond typically covers the insured against the following:
Forgery or Alteration
Loss inside the premises caused by theft, disappearance and destruction, robbery and safe burglary
Loss outside the premises caused by the robbery of a messenger
These coverages sometimes are referred to as Crime Coverage.
Fidelity bonds are divided into two primary categories: financial institutions (for example, banks, stock brokers, insurance companies and finance companies) and mercantile and governmental entities (non-financial institutions).