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Principles of Risk Management and Insurance, 13th Edition by Michael McNamara, George E. Rejda

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Surety Bonds

A surety bond is a contract in which the surety guarantees to a second party (the obligee) that a third party (the principal) will faithfully perform its obligations to the obligee. For example, a contractor may be financially overextended and unable to complete a building project. A public official may embezzle public funds, or the executor of an estate may illegally convert part of the estate assets to his or her own use. Surety bonds can be used to meet these loss exposures.

Parties to a Surety Bond

There are three parties to a surety bond:

  • Principal

  • Obligee

  • Surety (obligor)

The principal is the party that agrees to perform certain acts or fulfill certain obligations. For example, a construction company may agree to build an office ...

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