What is Your Role as a Surety Bond Principal?
Surety bonds require businesses under contract to complete their work or else repay their clients. By having a surety bond, the business can satisfy customer demands and improve its overall reputation. As the party that buys and maintains the bond, the business becomes the bond’s principal. They must work with the other parties in the bond deal to ensure that they meet their obligations. Let’s take a closer look at a principal’s role in a surety bond apparatus.
Part 1: Principals Procure and Pay for Bonds
Before you sign a contract with a client, you might have to provide proof that you have a surety bond. This bond is a contract in and of itself. It requires the business (which is the principal) to pay the client (also known as the obligee) a certain amount of restitution should they not complete their work as required.
The bond principal buys the surety bond from a surety company. This is the institution that will underwrite the bond. The bond will guarantee that the principal has the financial assets to compensate the obligee if a problem occurs. The bond will come with a premium that the principal must pay to the surety to keep the bond active. Once the principal obtains a surety bond, they can then proceed with the contract work as planned.
Part 2: Principals Pay Restitution on Bond Claims
If something goes wrong on your project, the obligee might have the right to file a claim against the surety bond. After filing a claim, they can qualify to receive payment for their losses. However, a surety bond payment does not allow the principal to get off scott-free.
Unlike insurance, a surety bond does not pay on the principal’s behalf. It simply guarantees that the principal has the money to repay the obligee. The terms of the bond will clearly lay out the restitution expected by the client for their losses. The principal will then have to provide this money. In some cases, the principal will pay the obligee directly. In others, the surety will pay the obligee and the principal will then repay the surety.
Because they have the surety bond, the principal has proven that they have the means to provide the compensation under a bond. That is why, when you buy a bond, you must accurately represent your company assets. A failure to do so could lead to a much bigger issue, and your role as the principal might completely fall through. Never fail to fully understand the terms of your surety bonds to make sure they match your assets.
Contact us if you have any questions about bond insurance or if you would like to find out if it is right for you!