What Is A Bond?Bonds are a method of transferring risk from one party to another. A bond is a legal document which guarantees the fulfillment of legal obligations between two parties known as the principal and obligee by a third party known as the surety. While there are several types of bonds, we will only concentrate on the types of bonds that pertain specifically to the construction industry within this page.
A Bond is NOT Insurance.The first misconception most contractors have about a bond is that it's another type of insurance policy. While a bond is normally issued by an insurance company, insurance is designed to pay for losses that occur as a result of a covered loss. The insured normally has a deductible and the remaining loss is paid to the insured or other interested party by the insurance company.
A bond is similar to a line of credit given to the contractor with the assumption that no losses will occur. A bond guarantees fulfillment of a contractual obligation on the part of the person or entity obtaining the bond, know as the principal, to the party entering into a contract with the principal, known as the obligee. If a problem arises preventing the principal from fulfilling their contractual obligations, then the bonding company, know as the surety, will oversee the fulfillment of the obligations. Unlike insurance, any loss incurred by the surety will be fully recovered from the principal(s) under an indemnity agreement.