Surety

What Is Surety?
The surety is the guarantee of the debts of one party by another. A surety is an
organization or person that assumes the responsibility of paying the debt in case the
debtor policy defaults or is unable to make the payments.

The party that guarantees the debt is referred to as the surety, or as the guarantor.

KEY TAKEAWAYS

 A surety is a person or party that takes responsibility for the debt, default
or other financial responsibilities of another party.
 A surety is often used in contracts where one party's financial holdings or
well-being are in question and the other party wants a guarantor.
 Surety bonds are financial instruments that tie the principal, the obligee—
often a government entity—and the surety.
 In the case of surety bonds, the surety is providing a line of credit to the
principal so as to reassure the obligee that the principal will fulfill their side
of the agreement.
Surety Explained
A surety is most common in contracts in which one party questions whether
the counterparty in the contract will be able to fulfill all requirements. The party may
require the counterparty to come forward with a guarantor in order to reduce risk, with
the guarantor entering into a contract of suretyship. This is intended to lower risk to
the lender, which might, in turn, lower interest rates for the borrower. A surety can be in
the form of a "surety bond."

A surety bond is a legally binding contract entered into by three parties—the principal,
the obligee, and the surety. The obligee, usually a government entity, requires the
principal, typically a business owner or contractor, to obtain a surety bond as a
guarantee against future work performance.

The surety is the company that provides a line of credit to guarantee payment of any
claim. They provide a financial guarantee to the obligee that the principal will fulfill their
obligations. A principal’s obligations could mean complying with state laws and
regulations pertaining to a specific business license, or meeting the terms of a
construction contract.

If the principal fails to deliver on the terms of the contract entered into with the obligee,
the obligee has the right to file a claim against the bond to recover any damages or
losses incurred. If the claim is valid, the surety company will pay reparation that cannot
exceed the bond amount. The underwriters will then expect the principal to reimburse
them for any claims paid.
Important Distinctions
A surety is not an insurance policy. The payment made to the surety company is
paying for the bond, but the principal is still liable for the debt. The surety is only
required to relieve the obligee of the time and resources that will be used to recover
any loss or damage from a principal. The claim amount is still retrieved from the
principal through either collateral posted by the principal or through other means.

A surety is not a bank guarantee. Where the surety is liable for any performance risk
posed by the principal, the bank guarantee is liable for the financial risk of the
contracted project.