Surety bond

A surety bond is a three-party contract where a surety guarantees a party will meet an obligation, paying out if they fail to.

Three parties are involved: the principal (who must perform an obligation, such as completing a construction contract or holding a license), the obligee (who is owed that performance), and the surety, which guarantees it. If the principal defaults, the surety pays the obligee or covers the cost of completion, then seeks reimbursement from the principal, who typically has indemnified the surety in advance.

This differs from ordinary insurance in a key way: a surety bond is not meant to absorb an expected loss the way a fire or auto policy does. It is closer to a credit product than a risk-transfer one, because the surety underwrites the principal's ability to perform and expects to recover what it pays out rather than treat it as a claim to be shared across a pool of policyholders.

In insurance technology, this shows up as digital bonding platforms that let agents and brokers quote, issue and deliver bonds online instead of through paper applications and underwriter review, along with automated underwriting that screens a principal's credit and financial history to speed approval for smaller, more standardized bonds.

Written by Insurtech Daily.