Surety Bonds- What are they?

At Stone Creek Insurance there is a surety bond department or as the ‘nomenclature of the day uses’ a Surety Practice. This is nice, but what do these surety bonds do for our clients and potential clients?

What is a Surety Bond?

‘An instrument designed chiefly to guarantee the integrity and honesty of the principal, his/her/their ability, financial responsibility, and his/her/their compliance with law or contract; a guarantee of performance. It is an agreement whereby one party, called the Surety, obligates itself to a second party, called the Obligee, to answer for the default of a third party, called the Principal.’  This is a Surety Company definition.

A Surety Bond is a financial guarantee that the Principal provides to an Obligee in supporting an agreement. The agreement can be statutory or contractual. If the Principal cannot perform the duties of the agreement the Obligee will look to the Surety Company to complete the agreement.

We just had a definition of surety bond, but had some terms in the definition, which need to defined, also. Those terms to be defined are as follows:

• Principal– It is the person, individual, and/or company through the actions, honesty or responsibility has to be guaranteed. The Principal is providing the bond, and must qualify for the bond.
• Obligee– The Obligee is the party in whose favor the bond runs or is protected against the loss by the bond.
• Surety- is the Corporation or person collaterally bound for payment of money or the performance of an act or duty by another (Principal).

So we have had the definitions of a bond and defined some of the terms. A better way to explain a bond is give an example.
The first example is the California’s Contractors State License Board (CSLB) $12,500 bond a Contractor has to provide to the Contractors State License Board in California. The Principal is the contractor. The Obligee is the California Contractors State License Board, and the Surety is (usually) the Insurance Company. This bond guarantees that a contractor is licensed in the State of California, acts honestly, and will build according to the code of California that their license allows. The Contractor must be licensed, bonded, and if applicable have Workers Compensation Insurance so that the Contractor can be paid for the work done. (There are other items to consider, and always consult your attorney.)
The second example is example of the definitions for the Performance and Payment Bond which a Contractor needs to provide an Obligee, usually a Government entity. This bond arises when a Contractor bids a ‘Public Works’ job and is considered the lowest bidder. The bond requirement is part of the contract. The Contractor then has to post a Performance and Payment Bond so they can enter into the contract. Therefore the Contractor is the Principal. The Obligee is the entity requiring the bond. The Surety Company is the Surety. What this bond does is guarantee the work to be done ( projected completed)-Performance bond, and any one that provides Labor and/or Material for the job will be paid- Payment bond.

To conclude a Surety Bond guarantees a Principal will perform duties required by an Obligee, and the Surety Company is guaranteeing the performance of the Principal.
If you or your Company are interested in Surety Bonds we are more than happy to sit down and provide the information necessary for this second opinion. Please call us at (925) 297-4202 or fill out the form at right.

*The above is meant for informational purposes only, please consult your agent and read through your bind for actual coverage limits and definitions.