Definitions and Useful Terminology

Definitions and Useful Terminology

Surety: What Is It?
Surety is a basic concept; however, it is commonly misunderstood by those who require it. Suretyship or bonding is an agreement in which one party (Surety) guarantees itself to a second party (Obligee) to respond for the debt or default of a third party (Principal). Surety is, therefore, a credit relationship, not insurance.

Surety vs. Insurance
Although Surety Bonds are issued by insurance companies, they are confused with, or misunderstood to be insurance; Surety Bonds differ from insurance because an insurance contract is a two-party agreement between an insured and an insurer whereas a Surety Bond is a three-party agreement among a Principal, an Obligee and a Surety.

A premium is paid for an insurance policy where a service charge is paid for a Bond.

Bonds: Needed by Whom?
Surety Bonds are required by Federal, Provincial and local municipal Governments to guarantee the satisfactory completion of construction work by contractors. The private sector also relies on bonds to guarantee the commitments of contractors, subcontractors and suppliers.

The Principal
The party, company or corporation to be bonded is named the Principal. The Principal is the party that must qualify for a Bond. The Bond does not protect the Principal. On the contrary, the Principal is required to reimburse the Surety for any loss the Surety might have sustained by reason of having issued a Bond on its behalf.

The Obligee
The recipient of the obligation rendered by the Principal is called the Obligee. The Obligee is the party that requests the Bond from the Principal. The Bond has been created to provide protection to the Obligee ensuring that the work contracted will be done according to the drawings and specifications and will be free and clear of liens.

The Surety
A Surety is the guarantor of the Bond and does guarantee that obligations rendered by the Principal to the Obligee will be performed to a satisfactory completion.

The Principal, who is required to provide the Bond, pays the Surety a service charge and the Surety who has qualified the Principal, executes the guarantee on behalf of the Principal in the form of a Bond. 

The goal of a Surety is not to pay losses, but to provide a service to qualified corporations who require a guarantor. In essence, the Surety and the Principal become “Partners”. A financially strong Surety is to the benefit of both the Principal and the Obligee.