A Surety Bond Defined
Surety bonds are an insurance policy for the obligee or the entity that is initiating the project.
In most situations, the obligee is a government agency, and the bond is in place to ensure the government is protected.
The obligee requires the principal (you) to secure and pay for the surety bond.
How Does a Surety Bond Work?
Surety bonds operate as a form of insurance to the obligee, since the obligee is the beneficiary that can file a claim if the bond’s obligation is not met. It is viewed as credit to the principal, as claims must be reimbursed by the principal to the surety.
When you’re required to get a surety bond, you are expected to fulfill the terms of the bond to avoid a claim being filed. If a claim is filed on your surety bond, you are expected to re-pay it 100 percent, plus legal costs. The bond is backed by the surety, but your company and all owners personally will need to sign an indemnity agreement, which says that you will re-pay the surety if a claim is filed.
Indemnity agreements assign your corporate and personal assets to re-pay the surety for any claim(s) and legal costs occurring from the work. The surety is only guaranteeing you if any claims arise. If they are wrong and cannot get reimbursement from you, they are ultimately responsible. For this reason, the surety company underwrites your credit to measure your ability to pay them as well as your likelihood of causing a claim.