SURETY: DEFINITION, HOW IT WORKS WITH BONDS AND DISTINCTIONS
A surety bond refers to an agreement, that provides financial security to the obligees. These types of agreements are unique because they involve three parties. The names of the parties include- principal, surety, and obligee. Surety bonds are legal contracts, these are purchased to reduce the possibility of the risks, during the non-fulfillment of the contractor’s obligation. The surety company charges a premium on the face value of the purchased bonds. A percentage of the premium ranges according to the credit ratings of the purchaser. An obligee with a bad history of credit might feel difficulties in purchasing a bond. The problem arises due to the greater financial risks perceived by the surety company, and as a result the percentage of the premium increases. A surety bond is crucial in the industry of construction. Usually, these bonds benefit the project owner in various ways. The need to purchase surety bonds is essential because it develops the economy of such an industry.
HOW DOES SURETY WORK?
A surety bond is a legally binding agreement that binds the surety company to compensate the obligee in the event of default by the contractor. Due to lower risks, the surety company shall encourage the project owner to invest more in such a particular industry. This results in overall development. It lets the contractor fulfill its obligation within the prescribed time limit. This website provides more information on how surety bonds work and their benefits.
SURETY BOND vs INSURANCE
As discussed above, a surety bond is an agreement of three people as it enables the principal to complete his obligation. Insurance is a contract of two persons subjected to selected risks. This means that the insurance shall compensate the insured person only on the occurrence of such selected events. In insurance, the compensation is paid directly to the insured person. Whereas in surety, the company shall reimburse the obligee only up to the default made by the principal, and the principal is liable to pay the compensation to the surety. Insurances are to deal with any unexpected event. On the other hand, sureties are, so that the project is finished without any delay. Moreover, surety is treated as a line of credit provided by the companies. Surety bonds are closely related to insurance, but in a technical aspect, they are different.
WHAT IS THE PURPOSE OF SURETY?
The sole purpose of surety is to reduce the risk of project construction to an acceptably low level. That provides security to the contractor and acts as a watchdog for the contractor.
CONCLUSION
Surety bonds are commercial instruments that are purchased to lower the risks. It is an agreement that is affected by three people and it provides a guarantee to the obligee. It assures the intended party that the contractor shall fulfill his obligations.