Surety bonds are a form of contract designed to protect against losses in the event of the failure of a second party to meet a specified obligation. A surety bond involves three parties.
The principal is the party that performs the obligation, the obligee is the recipient of the obligation, and the surety is the party that assures that the obligation will be met. In a surety bond, if the principal fails to meet the designated obligation, the surety will pay a certain amount to the obligee to cover losses.
The surety party is often an insurance company. The principal pays an annual premium, as one does in many forms of insurance, in return for surety credit. Claims by the principal are investigated by the surety, which will then pay for the claim if it is validated.
While the main function of a surety bond is to protect against losses, it also acts as a demonstration of the credibility of the principal and the ability of the principal to meet the obligation. Many businesses and contractors use surety bonds as a way to guarantee their services.
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