Identification

• A surety bond is a contract among three parties. The first party, called the surety, agrees to pay a stated sum on behalf of another party (the principal) to a third party called the obligee if the principal should fail to meet the terms of an agreement or contract between the principal and the obligee. Usually the surety is a division or subsidiary of an insurance company. In the event the surety must forfeit the bond it may take legal action to recover the funds from the principal.
  
  

Contract

• The use of surety insurance is especially important in the construction industry. Called contract bonds, construction surety bonds fall into three types. Bid bonds are sometimes required by governments to insure bids are made in good faith. Performance bonds guarantee that work agreed to will be completed. Payment bonds provide protection to sub-contractors and others who provide services and materials to a construction company.
  
  

Other Types

• The use of surety is not limited to the construction industry. Banks and other financial institutions who entrust large sums of money to individuals often require surety insurance to safeguard against possible losses. Governments often require notaries and other persons in a position of pubic trust to post surety bonds. A "bail bond" is a special form of surety insurance a court may require of an accused person to insure that person shows up for trial.
  
  

Requirements

• To get contract surety insurance a business has to have good credit and be of good reputation. They must also show they have the equipment, experience, ad financial resources to complete work agreed to. Surety insurers often want contractors to show they have an established relationship with a bank, including lines of credit or the equivalent. Requirements for other types of surety bonds are similar but may be more or less stringent.
  
  

Cost

• The cost of surety bonds varies, but is usually between 0.5 percent and 2.0 percent of the amount of the bond. Rates are determined by the credit rating of the principal and the likelihood circumstances may require the surety to forfeit all or part of the bond. However, programs like the US Small Business Administration's Surety Guarantee Program are available, primarily to assist businesses just starting out secure and pay for surety insurance. Bail bond costs work differently since trust is not the issue. Typically a bail bonding company requires 10 percent or more of the bond amount to offset the high risk inherent in posting bail.