Surety Bonding 101: Common Terms Every Business Owner Should Know

Travis Spitnale
10 hours ago
2 min read

If surety bonding is an essential part of your business, then understanding key terms is a necessity. An informed and educated business owner is a smart decisionmaker. This article outlines basic surety terms to clear up misinterpretations. Do you know what terms like obligee, principal, or bond premium mean?

Here are some essential surety terms:

Bonding. A financial instrument used to ensure accountability in contractual agreements. At their core, surety bonds involve three parties: the principal, the obligee, and the surety.
Principal: The business or individual required to obtain the bond. For example, a contractor who needs a performance bond for a construction project is the principal.
Obligee: The party that requires the bond, usually a government entity, client, or project owner. The obligee is financially protected by the bond in case the principal fails to fulfill the agreed-upon terms.
Surety: The insurance company or bonding agency that issues the bond and guarantees the principal’s obligations to the obligee. If the principal defaults, the surety steps in to cover the obligee’s losses, up to the bond amount.
Bond Premium: This is the cost the principal pays to obtain the bond, usually a percentage of the bond amount. The premium is based on factors like the principal’s credit history, project risk, and bond type.
Performance Bond and Payment Bond: Types of surety bonds common in construction, where a performance bond ensures project completion, and a payment bond guarantees payment to suppliers and subcontractors.

At Knight Insurance Group, we’re here to simplify the surety bonding process and make it a competitive advantage for your business.

Do you understand your bonding requirements, or would you like guidance on securing a bond line for your company? Let’s connect to explore your options.

Travis Spitnale is a risk and surety consultant at Knight Insurance, Group