Understanding the Different Parties in Surety Bond Agreements

Whether you expect a bond from a client, or have to carry a bond, you are integral to the function and execution of a bond. Understanding your role in a surety bond can help you follow your obligations to a contract.

The surety bonding process usually involves three different parties--the principal, the obligee and the surety company. Each of these parties plays an important role in the bonding process.

Understanding Surety Bonds

To understand roles in surety bonds, you first have to understand bonds themselves. Surety bonds are compensation and credit agreements between two parties in a contract.

When engaging in contracted work, a contractor has to complete the job according to the contract. Failure by a contractor to honor the contract might cause undue financial harm to the client. Therefore, the client will likely expect compensation for any lost costs. The surety bond can provide that compensation.

During the surety claims process, the contractor, the client and the surety company are all involved.

Understanding the Three Surety Bond Parties

Surety bonds function differently than traditional insurance. Surety bonds only guarantee that the bond carrier will compensate the client. Therefore, each party in the surety agreement plays a role in ensuring payment of the bond.

• The Obligee: This is the party that requires the bond. The obligee is often the contract owner. Contractors agree to complete assignments to the specifications of the obligee. If they fail to do so, the obligee may file a claim against the surety bond. The contractor then will have to compensate the obligee.
• The Principal: Principals are those that have to carry the bond. They carry the bonds to guarantee that they will pay back obligees if they can’t honor their contracts. When an obligee files a claim, the principal has to reimburse the obligee.
• Surety Companies: Surety companies are go-betweens for obligees and principals. They issue bonds according to government regulations and the requirements of obligees. When an obligee files a claim, the bond companies usually handles the initial payout. The principal then has to compensate the surety company for the bond costs. Effectively, even though a surety company issues a payout, the principal still has to make up for the lost costs.

At times it is hard to understand who receives payment from a surety bond claim. However, bond parties need to remember that the principal must pay the obligee. With the right bond, adequate transactions can take place.

Do you need a surety bond? We can help. Call La Familia Auto Insurance at 888-751-7511 for more information about a Dallas surety bond.