Key Takeaways
- Surety bonds involve THREE parties: Principal (who needs the bond), Obligee (who requires it), and Surety (who guarantees performance)
- Key difference from insurance: The surety expects NO LOSS—if a claim is paid, the surety will seek reimbursement from the principal
- Contract bonds include BID bonds (guarantee contractor will sign if awarded), PERFORMANCE bonds (guarantee completion), and PAYMENT bonds (guarantee subcontractors paid)
- License and permit bonds are required by governments to obtain business licenses—guarantee compliance with laws and regulations
- Court/judicial bonds include appeal bonds, attachment bonds, and fiduciary bonds for estate administrators
Surety Bonds
What is a Surety Bond?
A surety bond is a three-party agreement guaranteeing that one party will fulfill their obligations to another. Unlike insurance, the surety expects NO LOSS—if a claim is paid, the surety has the right to recover from the principal.
Quick Answer: A surety bond guarantees performance or payment. It involves three parties: the principal (who needs the bond), the obligee (who requires it), and the surety (who provides the guarantee). If the principal fails, the surety pays—but then seeks reimbursement from the principal.
The Three Parties
| Party | Role | Example |
|---|---|---|
| Principal | The party who needs the bond and makes the guarantee | Contractor |
| Obligee | The party who requires the bond and is protected by it | Project owner |
| Surety | The party who guarantees the principal will perform | Bonding company |
Surety Bonds vs. Insurance
| Feature | Surety Bond | Insurance |
|---|---|---|
| Parties | THREE (principal, obligee, surety) | TWO (insured, insurer) |
| Expected Loss | NONE—no loss expected | Losses expected and priced |
| Premium Basis | Based on principal's creditworthiness | Based on actuarial loss data |
| Right of Recovery | Surety can recover from principal | Insurer cannot recover from insured |
| Purpose | Guarantee performance | Transfer risk of loss |
Exam Key: The surety expects NO losses. Unlike insurance, where losses are expected and priced into premiums, sureties underwrite principals like lenders underwrite borrowers—based on ability to perform and repay.
Types of Surety Bonds
Contract Bonds (Construction)
| Bond Type | What It Guarantees |
|---|---|
| Bid Bond | Contractor will sign contract if awarded the job |
| Performance Bond | Contractor will complete the project per contract |
| Payment Bond | Contractor will pay subcontractors and suppliers |
| Maintenance Bond | Work will be free from defects for specified period |
Miller Act Requirement: Federal construction projects over $100,000 require performance and payment bonds.
License and Permit Bonds
- Required by government to obtain business licenses
- Guarantee compliance with laws and regulations
- Examples: contractor license bonds, liquor license bonds, motor vehicle dealer bonds
- Protect the public from business misconduct
Court/Judicial Bonds
| Bond Type | Purpose |
|---|---|
| Appeal Bond | Allows appeal of judgment while staying execution |
| Attachment Bond | Allows seizure of defendant's property before trial |
| Fiduciary Bond | Guarantees estate executor/administrator performs duties |
| Bail Bond | Guarantees defendant appears in court |
Fidelity Bonds
- Guarantee employee honesty
- Protect against employee theft and dishonesty
- Similar to crime insurance employee dishonesty coverage
- May be required by government or business partners
What is the key difference between a surety bond and an insurance policy?
A contractor submits a bid on a government project. Which bond guarantees they will sign the contract if awarded the job?
11.5 National Flood Insurance Program
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