What is a surety bond?

A surety bond is indeed a contract that involves at least three parties: the principal, the obligee, and the surety. The principal is the party that needs the bond, typically a contractor or service provider. The obligee is the entity or individual that requires the bond, often a government agency or project owner, to ensure that the principal fulfills their obligations. The surety is the party that backs the bond, providing a guarantee to the obligee that the principal will adhere to the agreed-upon terms.

This multi-party arrangement is fundamental to the functioning of surety bonds, as it ensures that there is a financial guarantee that can be called upon if the principal fails to meet their obligations. For example, if a contractor fails to complete a project according to specified terms, the obligee can claim against the bond for compensation, which the surety will pay up to the bond's limit. This structure is what distinguishes surety bonds from other types of agreements or policies that may only involve two parties or serve different purposes.