I think of bonds as the opposite of insurance.
An insurance policy is there for your benefit. The insurance company accepts the financial risk if there is a claim. Whereas a bond is for the benefit of a third party and you are taking the financial risk. The bond company is simply guaranteeing that the funds are available.
It’s easier to understand with an example. Imagine a contractor is building a new office building for a government agency. The agency wants a guarantee that the taxpayer won’t be left out of pocket if the contractor fails to deliver the offices as promised.
The answer is a surety bond. The contractor pays a premium to an insurer to purchase the surety bond. The insurer then pays the necessary compensation to the agency if the contractor fails to deliver. The big difference between this and ordinary insurance is that the insurer can and will go after the contractor to get this money back. The point of the surety bond is that the agency gets the assurance that it won’t have to chase after the money itself.
While government agencies commonly insist on a surety bond, it can work with any two organizations. The one that purchases the surety bond is “the principal,” while the one that gets any payout is “the obligee.”
If there’s anything else you need to know about surety bonds, contact us today.
There are hundreds of different types of bonds available. We can help with any bonding you may need in Pennsylvania.