A surety bond is a 3-party contract between the principal, obligee and surety carrier. The principal is who’s being required by the obligee to post the surety bond. The obligee requires the surety bond to transfer the risk of the principal’s performance from the obligee to the surety carrier. If the principal does what they say they will do then the bond is null and void. However if they do not then the obligee has the financial protection of the bond.
Surety bond principals can be individuals or businesses. Whoever is named on the bond as principal is the one responsible for performing according to the bond criteria. For example, a person getting their insurance license in the state of California must post a $10,000 surety bond to the state in order to receive that license. In this case, the principal is promising to perform according to the laws and regulations of California governing insurance agents. If they obey these laws, then nothing happens with the bond. If they do not then the state can make a claim on the bond to help financially protect their citizens.
In order to get a surety bond, the principal must apply for and be approved by the surety carrier. This approval process is called underwriting. The purpose of underwriting is to determine whether or not the bond is a good risk for the surety carrier. The primary goal of underwriting is to determine if the principal can indemnify (or pay back) the surety carrier if the principal does not perform and the surety carrier has to pay out a claim to the obligee.
The principal will always be required to indemnify a surety bond. Since the bond is guaranteeing the principal’s performance, the indemnity is basically just the principal guaranteeing the surety they will in fact do what they say they will do. Based on the underwriting, the surety may also require others to indemnify the bond in addition to the principal. For example, professional fundraiser/solicitor businesses are required to post a $50,000 bond in the state of Florida. The personal owner(s) of that company may be required to indemnify the bond in addition to the business listed as the bond principal.
If someone is requiring you or your business to get a surety bond, we at Alpha Surety are happy to answer any questions you may have, even if you don’t get the bond through us.