Surety Bonds

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Surety bonding has much more in common with commercial lending than it does with insurance. Unlike insurance coverage and fidelity bonding, surety bonding is essentially a three-party obligation. It consists of:

Obligee – This is the first party, the party to whom the indemnity is provided.

Note: A.I.A. construction bonds use the term Owner in place of Obligee.

Principal or Obligor – This is the second party, the party that performs or complies with contractual or statutory obligations for the obligee.

Note: A.I.A. construction bonds use the term Contractor in place of Obligor or Principal.

Surety – This is the third party, the party that guarantees that the principal will perform or comply with the contractual or statutory obligation.

The surety bond is a joint and several financial undertaking of the principal and surety. The principal bears full responsibility to perform the obligation.

Unlike most insurance coverage forms and policies that consist of many pages, the surety bond rarely exceeds one page. The format of all bonds (including their eighteenth-century language) is nearly identical. In most cases, the entire obligation consists of only three clauses. These are illustrated in abbreviated form as follows:

The recital (or “KNOW ALL MEN BY THESE PRESENTS” clause) always identifies the parties to the bond, in which the Principal and Surety are jointly and severally “held and firmly bound unto” the Obligee in the “full and just sum of” the amount, the penalty, or penal sum of the bond.

The “WHEREAS” clause describes the nature of the obligation.

 

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