A surety bond is a type of legal contract between three parties: obligee, principal and surety. The purpose of a surety bond is to provide a financial guarantee the principle will be paid to the obligee. Surety bonds scottsdale az are designed to protect private or public interest from the actions of the third-party involved in the project.
It’s similar to insurance for the benefit of one party. A second party pays for the benefit. A third party will finance the benefit. In addition, surety bonds are a combination of a line of credit and insurance policy. Yearly premiums are required by the principal party until the contract is complete.
What is an Obligee in a Surety Bond?
An obligee is the party that requires financial protection in the business contract. They are generally government agencies. However, they can be companies and individuals like a construction project owner. They often require a bond to cover any financial damages.
What is a Principal in a Surety Bond?
The principal in a surety bond is one who must take out the bond. It doesn’t mean the party is unethical or will breach any contract. They are usually a business trying to get a license to bid on a contract or from a government agency.
What is a Surety in a Surety Bond?
A surety is an insurance company that provides the full bonded amount to cover the principal. It provides a financial guarantee the obligee will get paid. And they will get paid regardless of whether the principal fulfills the contract.
Types of Surety Bonds Available
Many surety bonds exist. However, there are four commonly used surety bonds. A contract surety bond is used for construction contracts. The project owner is the one requiring the surety bond. A fidelity surety bond protects a business against malpractice involving an employee. The business is protected against any loss of a customer’s money because of an employee stealing company assets.
A commercial surety bond is used to protect public interests. This is the type of bond government agencies require. The obligee isn’t considered the government agency, but the public at large. The government agency requires the bond on behalf of the public.
A court surety bond is the fourth type of bond commonly used. It is required by an attorney or legal entity prior to a court proceeding. The attorney or legal entity requires the bond to protect from potential loss associated with fees. A court can require a surety bond to protect a person’s estate from any malpractice.
Using a Surety Bond in Scottsdale
A surety bond is financial protection. For example, a bond protects a construction project owner from a general contractor’s failure to complete the terms of a contract. If the general contractor fails to complete the project, the surety bond company pays for the financial damages for the general contractor. The general contractor is still liable to the insurance company. This means the general contractor must repay the surety bond company.