The 3-Party Agreement of Surety Bonds Explained

In Florida, a Surety bond assures the purchaser’s customers that the Guarantor will meet financial obligations if the contracted party fails to keep their end of the bargain.

There are many benefits to Surety bonds. For one, it instills confidence in customers and builds credibility for businesses. Obtaining a Surety bond is a great way to show your customers you have their best interests at heart.

A Surety bond is an agreement between three parties-the Principal, the Surety and the Obligee.

The Principal

The Principal is the person or entity that buys the bond. It is mandatory for many different types of businesses to obtain a Surety bond in order to operate legally. The Principal buys a Surety bond to guarantee that they will

➢ Fulfill their contractual obligations
➢ Ensure regulatory compliance
➢ Adhere to ethical principles
➢ Comply with court orders

Many businesses enter into contracts only with bonded contractors. A Surety bond helps build trust with customers and the government. When a Principal buys a Surety bond they communicate willingness to guarantee their performance through a neutral third party.

The Surety

The Surety is the neutral third party that promises to compensate the customer in the event of loss due to the Principal’s incompetence or inability to fulfill their contractual obligations.

The Principal pays a certain percentage (usually between one-half and two percent) of the bond amount as premium to the Surety. After the Principal buys the bond, the Surety sends the bond certificate to the Obligee.

The Obligee

The Obligee is the party that requires the Principal to purchase a Surety bond. Obligees can be federal, state, or local government agencies, courts, probate courts, or privately held companies. An Obligee can have specific requirements with regards to the type of bond and bond value.

If the Obligee has reasons to believe that the Principal has failed to honor a contractual obligation, they do not have to get directly involved in the claims and claims verification process. They can file a claim with the Surety, who will initiate an investigation to evaluate the legitimacy of the claim.

Bonds are almost always required for government construction projects as they are funded by taxpayer dollars. Government agencies require Surety bonds to ensure that contractors are using taxpayers’ money judiciously.

Are Surety Bonds and Insurance Policies the Same?

Many businesses and contractors consider Surety bonds as a type of insurance policy. In reality, a Surety bond and an insurance policy are two completely different products.

When a person or an entity buys an insurance policy, the insurer assumes the risk, whereas, in the case of Surety bonds, the risk ultimately rests with the Principal as they are required to reimburse the Surety after they pay the Obligee.

Need help choosing the right Surety bond in Florida? H.M. Vreeland has got you covered. With over 100 years of experience, we help businesses make informed decisions when buying bonds. To learn more, contact us at (407) 504-2741.