What is the primary function of surety bonds?

The primary function of surety bonds is to guarantee the completion of obligations by the principal. In a surety bond arrangement, there are three parties involved: the principal (the party that needs the bond), the obligee (the party that requires the bond), and the surety (the company providing the bond). The surety is essentially vouching for the principal, ensuring that if the principal fails to fulfill their contractual obligations, the surety will step in to cover those obligations. This provides a safety net for the obligee, giving them assurance that the desired outcomes will be met or that they will be compensated in case of default.

This function differentiates surety bonds from traditional insurance products, which often cover unforeseen accidents or liabilities. Instead, a surety bond is more of a promise that obligations will be honored, making it a crucial tool in construction, service contracts, and various professional fields where compliance with regulations or contracts is essential.