[h3]Surety Bonds[/h3]
When discussing surety bonds, the most basic principle to understand is that they {surety bonds} are not an insurance policy, but rather a guarantee. There are at least three parties to every surety bond agreement; these parties include, the “obligee” – the party who is the recipient of an obligation, the “principal” – the party who performs the contractual obligation and the “surety” – the party who assures the obligee that the principal can perform the task.
In a standard contract bond the three parties contemplated include, the principal (the contractor), the obligee (normally the project owner) and the surety (the company guaranteeing the principal will performance the “obligation” stated in the bond). As an example, the “obligation” requirement in a bid bond is that the principle (the contractor) will honor the bid submitted on a given project. The “obligation” requirement in a performance bond is that the principle (the contractor) will complete the project based on the contract agreement. The “obligation” requirement in a payment bond is that the principle (the contractor) will pay their sub-contractors and supplies as stipulated in the contract agreement.
Each party involved in a surety bond agreement has responsibilities to each other. The principal, for example, is responsible to the obligee in terms of performing its contract. By the same token, the obligee is responsible for honoring their contractual obligations, including paying the principal based on the stipulated guidelines of the agreed upon contract.
Additionally, the surety is responsible to the obligee with respect to honoring the bond agreement if, for example, the principal defaults under the terms of the contract. Here again, the obligee is still responsible to meet its requirements under the contract, including making payments due under the contract agreement, but this time to the surety that performs the previously agreed upon duties of the contract.
Finally, the principle and the surety have responsibilities one another. The principal is required to cooperate with any investigations of alleged default and must reimburse the surety for any payments and losses incurred that arise out of the default of the principal to the obligee. On the other hand, the surety has a responsibility to determine whether or not the principal is in default of the contract terms, if so, the surety must abide by the terms of the bond and indemnity agreement of behalf of the principal.