If you are working on getting a surety bond, you will likely be asked to sign an indemnity agreement. If you are married, they will require that not only you sign the form, your spouse will be expected to sign that as well. If there are other owners of your business, they and their spouses will also be required to sign the General Indemnity Agreement. If the principal defaults and the surety is called upon to pay the obligee, the surety with the implementation of an indemnity agreement requires that the obligee pay the surety back. Indemnity defined is, a protection against a loss.
Who does the surety bond protect?
We just found that surety bonds require indemnity agreements and that indemnity defined is a protection against loss. The question remains, who does the surety bond protect? Should the principal default causing the surety to pay an amount up to but not exceeding the limit of the bond, the bond penalty to or on behalf of the obligee. In short, a surety bond protects the party of the bond that required the bond in order to award the contract, license or permit to the principal. The protection afforded by a surety bond doesn’t stop here. There are Third party beneficiaries.
Who are the third party beneficiaries of a Surety Bond?
The obligee is the only beneficiary to the surety bond. Granted, the principal benefits from the issuance of a bond as it allows them to bid on a contract, be awarded a contracted or even obtain a license and permit. There are also third parties not involved in the issuance of a surety bond. Remember, there are 3 parties to a bond, the principal, the obligee and the surety. So you may be wondering, Who are the third party beneficiaries of a surety bond?
In the case of a statutory bond where federal and state governments require bonds for projects such as public building projects that guarantee labor and materials be paid for by a construction contractor that has been awarded a contract. This protects the subcontractors that were engaged to help with a contract, ensuring the laborers get paid and the suppliers also get paid.
Another example of third parties benefiting from surety bonds may be in the case of a public official that is required to have a public official bond in order to serve. Let’s say someone is injured by the bonded public official’s improper act, the person has the right to go after the official/ sue the official and the surety. Another example is in the case of an executor of a will. Executors are often required to post a fiduciary bond. If the executor of the will misuses the estate’s assets the heirs of the estate can sue not only the executor of the will but the surety that issued the bond as well.
A surety bond is a contract of indemnity. The surety agrees to pay or reimburse the obligee (the party of the bond requiring the bond of the principal) for a loss that the obligee may incur because of the potential loss caused by the principal or their default on the requirements set.
Surety Bond and Insurance
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