The surety company and insurance company are often confused with each other. Typically a surety company is part of an insurance company but it is not an insurance policy. For the projects that are Public funded, Surety bonds ensure prequalification of the contractors, completion of the project and protection of the taxpaying citizens.
A Surety bond can be described as a three-party contract. The three parties can be described as below
The Principal (Contractor in this case): The principal promises to fulfill all the promises mentioned in the contract.
The Obligee: It a party who is the recipient of the obligation by the principal.
The Surety: The party who is liable to reimburse all the losses in case principal fails to fulfill his obligations.
Contract Surety bonds are the bonds that used in the construction.
Bid Bond: This bond ensures that process of competitive bidding is carried out without any discrepancy. If the bidder has acquired this bond and fails to take up or complete a project then the associated loss will be reimbursed by the Surety Company. In this way, it provides financial security to the Obligee.
Performance Bond: This bond ensures that the contractors deliver their performance as per the terms and conditions of the contract. In the case of any default, the contract can be terminated by the Obligee and the performance Bond Company will be liable to get the project completed or reimburse the loss arising out of an incomplete project.
Payment Bond: there are many people, who are associated with the contract such as sub-contractors, workers, suppliers. This bond ensures their financial security by presenting a promise that they will be paid by the contractors on time.