Chapter 1 — Surety Bond Fundamentals
What Is a Surety Bond?
A surety bond is a three-party undertaking involving the Principal, the Obligee, and the Surety. It provides assurance to the Obligee that the Principal will perform or fulfill a specified obligation, subject to the terms and conditions of the bond.
The three parties to a surety bond
Every surety bond involves three parties. Identifying them correctly in your own requirement is the first step, because the documents an insurer asks for follow from who is bonding what, and for whom.
Principal — the party undertaking the obligation
The Principal is the contractor, supplier, importer, licensee or business that owes the obligation. It applies for the bond, pays the premium, and signs the indemnity agreement. The bond does not relieve the Principal of the obligation; it stands behind it.
Obligee — the party requiring or benefiting from the bond
The Obligee is the project owner, government agency, buyer, court, or regulator that requires the bond and benefits from it. The bond is issued in favour of the Obligee, and it is the Obligee that may claim against it if the specified obligation is not fulfilled.
Surety — the company issuing the bond
The Surety is the licensed insurance or surety company that issues the bond and answers to the Obligee, up to the bond amount, if the Principal fails to fulfill the obligation described in that bond.
How a surety bond works
The bond is a written undertaking limited to a specific obligation, a specific amount, and a specific period. What is being assured depends on the bond type: a bid bond assures that a bidder will honour its bid and sign the contract if awarded; a performance bond addresses performance of the contract works; a payment bond addresses payment to workers, suppliers or subcontractors; an advance payment bond covers repayment or liquidation of a mobilisation advance; a warranty or maintenance bond covers defects during a stated warranty period; a judicial bond secures an obligation arising from a court proceeding.
For that reason it is inaccurate to describe every surety bond as simply a guarantee of performance. The bond does what its own terms and conditions say it does.
The bond amount is usually a percentage of the contract price or a figure stated in the bid document, contract, permit or court order. The premium is the cost of issuing the bond. It is not a deposit, and it is not a fund set aside for the Principal.
Surety bond vs. insurance
Both are issued by insurance companies, and both are regulated, but they work differently.
- Who is protected. An insurance policy protects the insured against its own covered losses. A surety bond protects the Obligee against the Principal's failure to fulfill the bonded obligation.
- How many parties. Insurance is a two-party contract. A surety bond is a three-party undertaking.
- Who ultimately pays. Insurance losses are expected and are priced into the premium. In suretyship, the Principal signs an indemnity agreement, so if the Surety pays the Obligee it has the right to recover from the Principal. In practice the Surety is extending its credit standing, not absorbing the Principal's risk.
Common types of surety bonds
In Philippine practice, bond requirements are written into government procurement documents, private construction and supply contracts, customs undertakings, court proceedings and regulatory permits. The forms most often required are the bid bond or bid security, performance bond or performance security, advance payment bond, payment bond, warranty or maintenance bond, customs bond, and judicial bond. Each responds to a different obligation, so the requirement should always be read before assuming what the bond covers.
Why a Surety evaluates an applicant
Because the Principal remains ultimately liable, the Surety is assessing the Principal's ability to fulfill the obligation rather than the likelihood of a loss it intends to absorb. Evaluation commonly considers the applicant's legal and registration standing, financial condition, relevant experience and track record, current workload and bonding capacity, the nature and size of the obligation, and the indemnity or security offered.
Evaluation, underwriting, terms, pricing and approval rest with the applicable participating insurer.
What to check in your own requirement
Read the bond clause for four details: the bond type, the bond amount or percentage, the required validity period, and the named Obligee. Those four items determine the documents required and how quickly a submission can be organized.
Key takeaway
A surety bond assures the Obligee that the Principal will fulfill a specified obligation under the terms of that particular bond. The obligation covered differs by bond type, and the Principal remains ultimately responsible through the indemnity it signs.
Related topics
Relevant bond information
Need information about a surety bond requirement?
Submit an inquiry with your project details, and SuretyPH will organize your submission for the applicable insurer's evaluation.
Important Notice
Inquiries and supporting documents submitted through SuretyPH may be referred to the applicable participating insurer for evaluation. Submission does not constitute approval or issuance of a surety bond. Applications are subject to the insurer's requirements, evaluation, underwriting, terms, conditions, and approval.
SuretyPH is a digital platform for surety bond information, inquiries, requirements and request tracking. It does not underwrite, approve, bind, issue, or guarantee any insurance policy or surety bond. Evaluation, underwriting, approval, pricing and issuance are undertaken by the applicable licensed insurance company.