Contracts sometimes need a financial guarantee that work will be completed. A surety bond is a three-party agreement in which the surety guarantees to the obligee that the principal will fulfill a contractual or legal obligation. If the principal defaults, the surety may complete the obligation or pay up to the bond penalty.

Performance bonds, payment bonds, and license bonds are common forms. Unlike insurance, the principal remains ultimately liable and the surety expects reimbursement after any payment. Underwriting focuses on the principal’s financial strength, experience, and character rather than on pooling pure risk.

Public construction projects frequently require bonds as a condition of the contract. The bond form and amount are set by statute or by the obligee. Claims trigger investigation of the alleged default and can lead to takeover of the work or negotiated settlements with subcontractors and suppliers.

• Three-party guarantee of performance or obligation
• Principal remains liable to reimburse the surety
• Common in construction and licensing
• Underwritten on the principal’s capacity and integrity