Features

• Corporate bonds are a basic type of surety bond, and like all surety bonds there are three basic parties. The principal is the one responsible for obtaining the bond, and whose work performance is the subject of the bond--in other words, the contractor. The obligee is the beneficiary of the bond, and usually is paying the principal for the work covered by the bond. In most corporate bonds, the obligee is not stated at the time of bonding but is anyone who duly contracts work from the principal. The surety is the underwriting company that issues the bond and pays in the event a valid claim is made against it.
  
  

Function

• Each party to a surety bond receives some form of benefit. The obligee receives compensation for breach of contractor or unsatisfactory work without the time-consuming process of going to court. The principal is able to acquire and perform jobs by meeting the bond requirements of work contracts. And the surety calculates the rates to generate a profit by underwriting bonds.
  
  

Types

• There are literally dozens of kinds of surety bonds. Notaries must obtain a bond against negligence before they are certified, as must financial planners and other fiduciaries. Sometimes elected officials opt to get bond protection, as do personal representatives of an estate. In all cases, the existence of the bond protects people receiving services from these individuals.
  
  

Significance

• The existence of surety bonds transfers risk, thereby facilitating business. If a builder had to sue a contractor to enforce an agreement, it would assume massive losses for all the time work was not performed. If permitted individuals or businesses were not bonded, customers might not patronize them for fear of loss, and the businesses themselves might not perform certain activities to avoid the risk.
  
  

Considerations

• Though it is the surety that pays the obligee in the event of a claim against the surety bond, this does not indemnify the principal. In fact, under terms of the bond, the surety will likely be able to collect its costs from the principal, even if it means taking the principal to court or causing it to be bankrupt. The purpose of the bond is to guarantee swift and complete payment to the obligee.