Surety Bonds

A three party guarantee in which a surety promises an obligee that a principal will perform a contract or obligation.

Overview

Unlike insurance, a surety bond is written with the expectation of no loss: if the surety pays a claim, it seeks full repayment from the principal, usually backed by an indemnity agreement. Contract bonds dominate the market, including bid bonds, performance bonds guaranteeing completion of a project, and payment bonds protecting subcontractors and suppliers. The Miller Act of 1935 requires performance and payment bonds on larger federal construction contracts, and state Little Miller Acts do the same for public works. Commercial bonds cover license and permit requirements, court bonds, customs, and fiduciary duties. Underwriting focuses on the principal's character, capacity, and capital rather than on actuarial loss rates.