Surety

Reviewed by Bhavana | Updated on Aug 27, 2020

Meaning of Surety

A surety is an assurance of one party's debts to another. A surety is an entity or an individual who assumes the duty of paying the debt in the event that a debtor policy fails or is not able to make the payments. The party which guarantees the debt is called a surety, or the guarantor.

Surety Explained in Detail

A surety bond is a legal binding agreement signed between three parties — the lender, the trustee, and the guarantor. The obligee, generally a government agency, allows the principal to receive a security bond as a protection against future work output, normally a business owner or contractor.

The surety is the entity offering a credit line to guarantee the payment on the demand. They give the obligee a financial guarantee that the principal will meet his obligations. Obligations of a principal may mean compliance with state laws and regulations relating to a specific business license, or compliance with the terms of a construction contract.

If the principal fails to deliver on the terms of the contract signed with the obligee, an obligee shall be entitled to lodge a lawsuit against the bond in order to recover any damages or losses suffered. If the claim is legitimate, the insurance provider must pay reparation which can not surpass the value of the bond. The underwriters would then expect the principal to pay them back on any fees they might have made.

An Important Note

A surety is not an insurance policy. The payment made to a surety firm pays for the bond, but the principal remains responsible for the debt. The surety is only necessary to relieve the obligee of the time and money that shall be utilised to recover from a principal any loss or damage. The balance of the claim is also recovered from the principal by any collateral placed by the principal or by other means.

A surety cannot be treated as a bank guarantee. A surety is liable for any performance risk shown by a principal, the bank guarantee is liable only for the financial risk of a contracted project.