What is the primary purpose of a surety bond?

The primary purpose of a surety bond is to guarantee compliance with a contract. Unlike traditional insurance, which protects against losses or damages, a surety bond is a three-party agreement where one party (the surety) guarantees that another party (the principal) will fulfill their obligations to a third party (the obligee). If the principal fails to meet the terms of the contract, the surety is responsible for covering any losses up to the amount of the bond. This establishes trust and ensures that obligations are met, making it a critical tool in various industries, such as construction and finance, where meeting contractual agreements is essential.

In contrast to being an insurance coverage, which addresses risks related to accidents or damages, a surety bond focuses specifically on performance and compliance. It is also not designed to serve as collateral for loans or offer investment opportunities, as its main function is to protect against the risk of non-performance and ensure contractual commitments are honored.