Surety bonds are often used between two parties that have a contractual agreement for services or work to be performed. There are often three parties that are involved with the drafting of the bond. These include:
- This is the party that will be performing the contractual obligation.
- This is that party who will be protected by the surety bond and to whom the Principal is obligated.
- This is a bonding company or entity that assumed the risk of the contract and will pay the Obligee according to the bond agreement in the event the principal defaults on the contract terms.
Who Needs a Bond?
According to those who work with Moody Insurance Worldwide, anyone dealing with contractual labor (whether buyer or seller) should have a bond in place protecting the arrangement. Worldwide surety bonds are often used with contractors, subcontractors, or other service-specific individuals. There are also many types of bonds, some of which covers project bids, payments, and performance.
Separate from Insurance
A bond is not an insurance policy; it is a financial guarantee. Because it is different from insurance, it is important that you only work with companies or individuals that carry insurance as well as bond eligibility when dealing with contractors or sub-contractors. The bond process and payout protects the investments of both parties involved in the project or contract.