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Surety Bonds
*Surety Bonds are contracts guaranteeing that specific obligations will be fulfilled. The obligation may involve meeting a contractual commitment, paying a debt, or performing certain duties. Under the terms of a bond, one party becomes answerable to a third party for the acts or neglect of a second party.

Under modern suretyship, an insurer's promise of performance is available to meet a wide variety of business, governmental and individual needs. Surety bonds are required in a significant number of business transactions as a means of reducing or transferring business risk. State and federal government agencies require surety bonds for the purpose of reducing public responsibility for the acts of others, and the courts require bonds to secure the various responsibilities of litigants, including the ability to pay damages.

A typical surety bond identifies each of three parties to the contract and spells out their relationship and obligations. The parties are:

  1. A Principal - The party who has initially agreed to fulfill the obligation which is the subject of the bond. Also known as  the Obligor.
  2. An Obligee - The person or organization protected by the bond. This term is used most frequently in surety bonds.
  3. A Guarantor or Surety - The insurer issuing the bond.

Performance Bonds
*Written guaranty from a third party guarantor (usually a bank or an insurance company) submitted to a principal (client or customer) by a contractor on winning the bid. Performance bond ensures payment of a sum (not exceeding a stated maximum) of money in case the contractor fails in the full performance of the contract. These bonds usually cover 100 percent of the contract price and replace the bid bonds on award of the contract. Unlike a fidelity bond, a performance bond is not an insurance policy and (if cashed by the principal) the payment amount is recovered by the guarantor from the contractor. Also called standby letter of credit.

*Bid Bond
Written guaranty from a third party guarantor (usually a bank or an insurance company) submitted to a principal (client or customer) by a contractor (bidder) with a bid. Bid bond ensures that on acceptance of bid by the customer the contractor will proceed with the contract and will replace the bid bond with a performance-bond. Otherwise, the guarantor will pay the customer the difference between the contractor's bid and the next highest bidder. This difference is called liquidated damages which cannot exceed the amount of the bid bond. Unlike a fidelity bond, a bid bond is not an insurance policy, and (if cashed by the principal) the payment amount is recovered by the guarantor from the contractor. Also called bid guaranty or bid surety.

* These definitions are for general purposes reference. Your actual bond definitions wording can and will vary from carrier to carrier based upon many factors. Do not take these definitions to mean they are literal and exact to all bonds / bond forms.

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