What Are Surety Bonds & How Did They Originate

A surety bond is a legal contract that consists at a minimum of at least three parties. The principle is considered to be the key party who will be performing the contractual obligation. The obligee is the receiving party of the obligation and the surety is the party or entity that ensures the principles obligations are performed and carried out according to the contract.

For the duration of this agreement or contract, the surety concedes that they will be held responsible for the obligations the principle agreed to if the principle does not adhere to their promises to the obligee.

Surety bonds were originally used hundreds of years ago as an instrument to encourage trade over long distances. 1880 was the year the first corporate surety firm was established in American. The company called itself United States Fidelity and Casualty Company of New York. Over the years the Surety & Fidelity Association of America estimates that the annual US surety bond premiums to be in excess of $3.5 billion dollars and growing strong.

There are many types of surety bonds and they fall into 3 categories which consist of Contract, Court and Commercial Bonds. Contract bonds are frequently used in the construction industry and are generally required by the general contractor (and frequently the sub contractor) to guarantee the contract of the building project, referred to as a performance bond. Ultimately owners and contractors alike may also obtain a payment bond as well to guarantee their subcontractors and suppliers are paid for work that is completed. With any federal construction projects in the United States, contractors must provide two bonds, a performance bond and a labor and material payment bond. The issuing surety company must be named as a qualifying surety on the Treasury List, which is updated every year by the U.S. Department of Treasury. This all came about by The Miller Act which stated before a contract exceeds $100,000 for the construction, modification or repair of any community building or work for the Federal Government, the person offering the services must furnish those two bonds.