A surety company issues bonds or guarantees on behalf of other entities essentially acting as an insurer to ensure damages in case of default of the party on whose behalf the guarantee or bond has been issued. Such guarantees or bonds are required by government entities, by private organizations and by the construction industry in order to issue work or licenses. These bond issuing companies generally do not work in the areas traditional insurance companies do, though many traditional insurance companies issue such bonds of obligation.
In many places even for something like an auto-dealership license the applicant has to provide a bond, in other mainstream cases, sureties are required from contractors to ensure performance and protect against default. This is one of the oldest methods of guaranteeing performance or obligations.
Essentially sureties are contracts issued by a company to an applicant for something – a license or a contract – where a third party requires a guarantee on the behavior and performance of the applicant. If the applicant fails to deliver on or keep promises, the surety pays up.
Civil surety bonds aren’t much different in principle from criminal bail bonds where there are also sureties working in an organized fashion, but most commonly, such companies are insurers who are engaged in insuring the work of civil contractors.
A surety bond differs from an insurance policy mainly in that while insurance policies are triggered off by the contingency of a event of remote probability, sureties are triggered off by an unpredictable event that is not unexpected in the line of work.
Companies in the industry issue sureties to guarantee that a principal would perform the obligations he promises to the oblige. This is very important in big projects and work where everyone associated with the work can be affected on the non performance of a single contractor. Construction bonds are used to refer to a variety of bonds required in construction work to prevent default of contractors and suppliers.
A principal cannot evade liability by failing in obligations as liability is joint and several with the bond issuer, and similarly, in most cases all defenses available to a principal are available to the surety.