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Surety bond: Definition, Example and Related Terms

What is a Surety bond ?

In simple terms, a surety bond is like a safety net. Imagine you're a contract manager, and you hire a company to do a job for you. But, what if that company messes up or doesn't finish the job? You'd be stuck, right? That's where a surety bond comes in. It's a promise between three parties - you (the person needing the job done), the company doing the job, and a third party (usually an insurance company). The third party promises to pay you a certain amount of money if the company you hired doesn't do the job right. So, it's like a safety net that protects you from losing money.


  • Scenario Description
    Let's say you hire a company to build a new office building for your business. You've signed a contract with them, and they've promised to finish the work within a year. If the company fails to complete the building on time, or if the work is not up to the standard agreed upon, the third party (the insurance company that provided the surety bond) will pay you the amount specified in the bond. This way, you're not left with an unfinished building and a huge loss of money.
    Imagine you're a government department and you've contracted a software company to develop a new system for you. They've promised to deliver the system within six months. If the software company fails to deliver the system on time or if the system doesn't work as expected, the surety bond provider (the insurance company) will compensate you for the loss. This ensures that you're not left with a faulty system and a financial loss.

Related terms