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Basics of Surety Bonds

Surety bonds provide financial guarantees that contracts and other business deals will be completed according to mutual terms. Surety bonds protect consumers and government entities from fraud and malpractice. When a principal breaks a bond's terms, the harmed party can make a claim on the bond to recover losses.

A surety bond or surety is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation.

Each surety bond that's issued acts as a three-party contract.

The principalpurchases the bond to guarantee the quality of work to be done in the future. This is usually a business owner or other professional.

The obligeerequires the principal to purchase a bond to avoid potential financial loss. This is usually a government agency.

The surety issues the bond and financially guarantees the principal's capacity to perform a specific task, usually a financial institution such as an Insurance Company whose charter has legal power to act as a Surety to others.
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