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Home > Blog > Principal Obligations to Bond Obligee
TUESDAY, SEPTEMBER 12, 2017

Principal Obligations to Bond Obligee

When your business enters into a contract with another party, you promise, legally, to complete a service according to specific guidelines. Failing to complete a contract could lead to legal consequences. Furthermore, your company might have to compensate the client for lost costs associated with the failure.

In many cases, contract owners require contractors to carry surety bonds. These bonds basically function as a form of credit. They guarantee that the contractor will compensate the owner in case they cannot complete the project.

How do Surety Bonds Function?

When a contract owner requires a bond, it will likely stipulate certain requirements. The bond may have to carry certain forms of compensation. Therefore, the contractor must contact a surety bond to get a policy that meets these requirements.

After a surety bond issues the policy, the contractor becomes the bond’s principal, or the party that has to carry the bond. The contract owner becomes the obligee, or the party that requests the bond. If the principal fails to honor the contract, the obligee can then contact the surety company and file a claim. The surety company then may pay some or all of the bond stipulations.

But, the principal mustn’t think this payment lets them off the hook. Bonds don’t function like insurance policies. Even though the surety company may pay the obligee, the principal usually has to compensate the surety company for paying the bond. Therefore, failing to honor a contract may still mean a financial loss, even if you carry a surety bond. The bond only helps protect the client’s losses, rather than the principal’s.

Honoring Contract Commitments

After getting a bond, the principal still owes commitments to obligees. With the correct attention to clients and their contracts, businesses can reduce the risks that clients will have to file a claim against their surety bonds. This can create a better project for all parties.

  • Fully understand a contract’s stipulations and requirements before agreeing to the contract. If possible, allow your legal counsel to review the contract for issues. If you cannot adequately handle a job, it may be best to remove yourself from consideration for a contract.
  • Many clients require bonds from all contractors. Therefore, understand what the client’s bond requirements at the time you agree to the project.
  • After you begin a project, honor your financial commitments. Make sure you pay all expenses required of you under the contract. This may include paying sub-contractors or suppliers. Never leave debt that may impact clients at a later time.

As a precaution, always keep the oblige fully aware of the contract’s progress. If you encounter problems, cooperation between parties may help minimize the risks of loss.

Get covered today. Call Ten Eyck Group at (518) 464-0059 for a fast, free Albany surety bond quote.

Posted 12:14 PM

Tags: surety bonds
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