Who is the Surety Bond Obligee?

A surety bond is a 3-party contract between the obligee, principal and surety carrier. The obligee is who is requiring the principal to post the surety bond. They require the surety bond to transfer the risk of the principal’s performance from themselves to the surety carrier. If the principal does what they say they will do, the bond is null and void. However, if principal do not, the obligee has the financial protection of the bond. 

Obligees are most commonly local, state or federal government agencies. They can also be individuals or businesses wanting the principal to do work for them. In the case of a governmental obligee, the surety bond is typically guaranteeing the principal will follow laws and regulations established by the obligee. In the case of an individual or business obligee, the surety bond is typically guaranteeing the principal’s performance based on a specific contract. This could include someone hiring a contractor to build a building or a business bringing on a new franchisee. Whatever the case, the obligee has some established performance criteria they want the principal to follow and the surety bond financially guarantees they will.

Surety bonds are a great tool for the obligee to protect their citizens or themselves from the principal’s non-performance. For example, a principal running a sweepstakes open to New York residents must post a bond to New York in the total amount of prizes potentially being given away. The bond guarantees that if a New Yorker wins a prize according to the official rules, the principal will actually give that prize to the winner. If they do not, New York can make a claim on the bond to financially protect its citizen. In the case of a franchise business, the bond guarantees the franchisee will behave according to the details of their franchise contract. If they do not, the bond financially protects the business from their franchisee’s non-compliance.

How does a surety bond financially protect the obligee?

If the principal doesn’t perform according to the bond specifications then the obligee can make a claim on the bond. If the non-performance is not rectified, the surety carrier will have to pay the obligee up to the full bond amount. Then, it is up to the surety carrier to deal with the principal on getting their money back.

Alpha Surety has helped numerous government agencies, businesses and associations establish successful surety bond programs. If you think a surety bond may help you in doing business, we’d love to talk to you.