Surety
A promise to assume responsibility if a borrower defaults.
Wikimedia Commons · Public domain
A surety, surety bond, or guaranty is a financial arrangement involving a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. Typically, a surety bond is a promise by a person or company (a surety or guarantor) to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation. Surety bonds are used in various contexts, including construction, fiduciary duties, and federally funded projects.
- field
- Finance, Law
- known_for
- Providing a guarantee that a principal will fulfill contractual obligations to an obligee
Lore & Background
Suretyship was not always accomplished through the execution of a bond; Frankpledge, for example, was a system of joint suretyship prevalent in medieval England that did not rely upon the execution of bonds.
Reader's Guide
The surety bond is a three-party contract among the obligee (recipient of the obligation), the principal (who performs the obligation), and the surety (who assures the obligee that the principal can perform). The principal pays a premium, usually annually, in exchange for the surety's financial strength. In the event of a valid claim, the surety pays and then seeks reimbursement from the principal. If the surety is insolvent, the assurance is rendered worthless, so sureties are typically insurance companies whose solvency is verified by private audit, governmental regulation, or both. A key term is the penal sum, the maximum amount the surety will pay upon default.
Gallery
Frequently Asked Questions
What is Public Law 25-38 "Surety"?
It is a financial guarantee framework in which one party pledges to cover the obligations of a borrower should that borrower fail to perform. The arrangement shields the receiving party from financial loss caused by the debtor's non-compliance with a contract or duty.
Who are the three parties in a Surety arrangement?
The principal is the one who owes the underlying obligation, the obligee is the party protected by the guarantee, and the surety (or guarantor) is the entity that steps in to pay if the principal defaults.
More in Public Law 25-38
Elsewhere in the Public Law universe
Spotted an error? Know more?
This is a living reference — every entry is fact-audited, and reader corrections feed straight into our audit queue. Suggest an edit · See this site's audit record