Surety bond terminology can be complex, and it’s important for buyers to understand the terms when purchasing a surety bond. Here is a glossary of common terms used in the surety industry:
Obligee: The party that requires the surety bonds to be issued and benefits from the bond.
Principal: The party required to obtain the bond and is responsible for fulfilling the obligations stated in the bond. (If you’re a contractor getting bonded, that would be you.)
Surety: The company that issues the bond and guarantees the obligee that the principal will fulfill their obligations stated in the bond.
Bond: A written three-party agreement that serves as a financial guarantee for the obligee that the principal will fulfill their contractual obligations.
Indemnity: A contract where the principal agrees to reimburse the surety for any losses incurred due to the principal’s failure to fulfill their obligations stated in the bond.
Premium: The fee paid to the surety company for issuing the bond.
Limit of Liability: The maximum amount of money the surety is liable for under the bond, also commonly called the penal sum.
Bid Bond: A type of surety bond that guarantees that the principal will enter into a bonded contract if their bid is accepted.
Performance Bond: A type of surety bond that guarantees that the principal will perform the work according to the terms of the contract.
Payment Bond: A type of surety bond that guarantees that the principal will pay their subcontractors, suppliers, and laborers for work performed under the contract.
Maintenance Bond: A type of surety bond that guarantees that the principal will correct any defects or deficiencies in their work during a specified period after completion.
Penal Sum: The maximum amount of money that the surety will pay in the event of a default by the principal, also known as the limit of liability.
Default: Failure of the principal to fulfill their obligations stated in the bond.
Underwriting: The process of evaluating the risk associated with issuing surety bonds and determining the premium.
Collateral: Assets pledged by the principal as security for the bond.
We hope this glossary helps you better understand the terms used in the surety industry!
The Mahoney Group, based in Mesa, Ariz., is one of the largest independent insurance and employee benefits brokerages in the U.S. An employee-owned organization, we’ve been providing our clients with the confidence to face whatever lies ahead for more than 100 years. For more information, contact us online or call 877-440-3304.
This article is not intended to be exhaustive, nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel or an insurance professional for appropriate advice.