WHAT IS A SURETY BOND?

A bond is a guarantee of the performance of a contract or other obligation. Bonds are three party instruments, by which one party (the surety) guarantees or promises a second party (the owner) successful performance by a third party (the contractor or principal). A bond is also an instrument of pre-qualification, whereby one party says to a second party that the third party has been examined and found to be qualified to complete the obligation or undertaking in question.

SURETY IS NOT INSURANCE

Insurance is a device whereby a group of people contribute to a common fund for the express purpose of utilizing this fund to pay for losses sustained by individual participants. Surety, on the other hand, is basically a credit function. While insurance presupposes loss, surety does not. While the charge for insurance and surety is called a premium, the terminology represents the only real similarity between the two.

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