There are three parts of a Bond:
- The Obligee
They are the entity that requires the Bond.
- The Principal
This is the person who will perform the contractual obligations set forth in the Bond form.
- Surety Company
This is the entity who will be insuring the principal of the obligations referenced in the Bond Form.
Through this Bond agreement, the Surety Company agrees to uphold the contractual promises or obligations made by the Principal to the Obligee if the Principal fails to uphold his promises or obligations.
A key term in nearly every surety bond is the “Penal Sum.” This is a specified amount of money which is the maximum amount that the Surety Company will be required to pay in the event of the principal’s default. The premium charge is determined accordingly.
For example, if you are doing a construction job and in order to complete your job you need to dig up the sidewalk, the city will require you to obtain a Bond. What this Bond does is gives the City someone to go to (The Surety Company) to get the sidewalk rebuilt if you fail to do so.
A typical use for Bonds is to secure the proper performance of fiduciary duties by persons in positions of private or public trust. For example all companies that offer their employees a 401(k) Plan are required to have an ERISA Bond, which is a type of fiduciary bond to cover any possible illegalities by the administrators of the Plan.