A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation
Most surety companies are subsidiaries of insurance companies, and both surety bonds and traditional insurance policies are risk-transfer mechanism regulated by state insurance department. However, both operate on different business models. Traditional insurance is intended to compensate the insured against unforeseen or adverse events, so the policy premium is determined by projecting the expected losses and enough premiums earned to wrap the losses and earn a satisfactory return. In contrast, the surety bond prequalifies the contractor by evaluating the contractor’s monetary strength and construction capability. In theory, the surety underwriters the supplier with no hope of loss, so the premium is above all a fee for the surety’s complete prequalification services.