“One responsible for a debt should the borrower default.”
A Surety Bond is a written agreement providing for monetary compensation or performance should there be a failure to perform specified acts within a stated period.
Let’s talk about this three-party agreement.
The Obligee is the party that is requiring the bond and who the bond favors. The bond protects this party against loss. This party can be a court, person, firm, corporation, government or an agency of the government.
The Principal is the party that provides the bond and is responsible for the fulfillment of the contractual obligation. If the obligation is not fulfilled, both the principal and the surety are liable to the obligee for monetary damages.
The Surety is legally liable for the debt, default, or failure of the principal. This can be an individual or a company. Most of the time, it this is going to be the insurance company. The surety’s liability is generally limited to the amount of the bond.
In Simple TermS
The principal pays a premium to the surety company in exchange for a bond that will provide financial strength. In the event of a valid claim, the surety company will pay the obligee and seek reimbursement from the principal for the amount that was paid out on the claim and legal fee incurred.
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