Chapter 11: Bonds Copy

A BOND is an agreement by one party, the surety (or guarantor), to answer to a third person, the obligee (or beneficiary), for the debt or deficit of a responsible party called the principal (or obligor). Stated simply, the surety guarantees the principal’s conduct, and if that conduct falls short, the surety is responsible to the obligee.

A bond is a three-party contract involving the surety, principal, and oblige. The third-party has some control over the bond contract as well as insurable interest. A surety bond provides monetary compensation if the bonded party fails to perform a certain act, such as a contract. It is commonly issued (1) in connection with court action, (2) to someone seeking a license or permit, and (3) to a construction contractor. The surety bond guarantees that the principal is honest and has both the financial capacity and the work expertise to carry out the obligation for which he or she is bonded.