Surety bonds ensure that investments in projects are protected, regardless of project completion. These bonds are prevalent in construction and often required for government contracts.
Why opt for a surety bond?
A surety bond acts as a financial guarantee between two parties. For instance, if a contractor is tasked with a government project, the government would want assurance against potential losses if the contractor defaults.
The mechanics of surety bonds:
In this scenario, the contractor pays for the surety bond from an insurance company. If the contractor doesn’t fulfill the project’s terms, the insurer compensates the government. However, the insurer will seek reimbursement from the contractor. This bond ensures the government doesn’t have to pursue the defaulting contractor for losses.
Understanding key terms:
The party buying the bond is known as “the principal,” while the party safeguarded by it is “the obligee.”
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