A surety bond is an obligation, typically in the form of a signature, to pay the agreed amount of money or the other agreed action in case of default, failure, or accident. It’s a three-part agreement by which a single party (usually the principal) pledges the performance or results of a second party (usually the obligee) to a third party (usually the surety). There are two general categories of surety Bonds: (1) specific contract surety bond; and (2) common carrier surety bond.
A specific contract bond is issued by a jurisdiction, and it is generally enforced by state law. Common carrier surety bonding is an interstate bond claim issued by out-of-state commercial surety companies. An inter Interstate bond claim may be lawful even though the claims are situated outside the state that provides the authority for such claims. The authority for issuing the bonds is normally vested in the states that border the boundaries of the defendants. In this regard, an inter Interstate bond claim is different from a national claim.
A specific contract bond obligates the principal to undertake specified acts. In cases of certain private contracts, the principal is under a statutory or common obligation. However, it is common for a state to recognize a private contract claim to include an implied duty of care or an obligation of trade. For example, the New York bonding authority recognizes an implied contractual duty to provide insurance to certain business owners against acts of nature or of negligence on the part of the principal.
Surety Bonding obligates the principal to fulfill specified obligations. The obligee is typically a third party. The obligee typically has a legal relationship with the principal. For example, a manufacturer may be obliged to pay for materials and labor provided by the dealer to fulfill warranty requirements. A lender may be obliged to fulfill the loan terms and to provide insured funds to repay a claim.
Surety Bonding obligates the obligee to incur certain expenditures. A bond includes the costs to insure the principal against losses and other third party claims. The costs may include compensation for lost wages or a loss of profit. Surety Bonding may also include costs associated with processing claim payments. These costs are reflected in the premium paid by the obligee.
Surety Bonding secures contract compliance by obligating the principal to perform specified acts. Surety Bonding is often referred to as a contractual obligations bond. The fact that bonding protects the obligees from losses or claims makes Surety Bonding a unique form of liability insurance. The fact that Surety Bonding secures specific performance does not change the fundamental relationship between the obligee and the principal.
