Understanding Your Surety's Indemnity Agreement

Contractors on public and private projects are often required to obtain surety bonds to secure their bidding, payment, and performance obligations under a construction contract.¹

A bond is a three-party contract entered into by the surety, the principal (contractor) and the obligee (owner) in which the surety guarantees to the obligee that the principal will perform certain obligations under the contract between the obligee and the principal. For example, a surety on a performance bond guarantees the owner that the contractor will complete the project; and a surety on a payment bond guarantees the owner that the contractor will pay all intended claimants under the bond.²

Most surety companies are subsidiaries or divisions of insurance companies and both surety bonds and insurance policies are regulated by state insurance departments. However, a surety bond is not an insurance policy.