In one sense of the word, surety means being certain of something; it also refers to someone who is financially responsible for another person. In terms of insurance, a professional surety bond is a contract between an insurance company, the professional it insures, and the professional’s clients. Here is an explanation of the three parties involved in this special type of policy.
The party who promises to perform a certain service for the public is the principal, and also the purchaser of the bond. For example, a construction contractor agrees to abide by regulations and to deliver a finished product to his clients.
The surety, which is usually an insurance company, guarantees the principal’s performance. If the principal does not meet the client’s expectations, then the surety reimburses the client.
Members of the public who enlist the services of the principal are the protected parties or obligees in the bond agreement. If a professional does not live up to obligations, then the obligee can seek repayment from the surety.
Everyone benefits from surety bonds. Even where not required, being bonded gives the principal a higher status that increases client confidence. Surety bonds also benefit clients, as well as generate revenue for the insurance companies acting as sureties.