Every surety bond has three parties, and the whole thing makes sense once you can name them.

The three parties

  • Principal — the business or person who buys the bond and has to perform the obligation. Your client.
  • Obligee — the party the bond protects, and almost always the party who required it in the first place.
  • Surety — the company guaranteeing that if the principal fails, the obligee is made whole.

So who is the obligee?

It depends on why the bond exists:

  • License and permit bond — the state agency, city, or department that issues the licence. The bond protects the public and the regulator, not the licensee.
  • Contract or performance bond — the project owner who hired the contractor. On public work, the government body letting the contract.
  • Payment bond — protects subcontractors and suppliers, with the owner named as obligee.
  • Notary bond — the state, on behalf of the public who rely on the notary.
  • Court bond — the court, or the party the court is protecting.

The misunderstanding worth heading off

Clients frequently assume that because they are paying for the bond, the bond protects them. It does not. A surety bond is not insurance. If the surety pays a claim to the obligee, it turns around and collects from the principal under the indemnity agreement that was signed at application.

The clearest way to say it: insurance is money you buy to protect yourself; a bond is credit you buy to protect somebody else, and you are on the hook for it.

Dual obligee

Sometimes more than one party needs protecting — most often when a lender is financing a project and wants standing alongside the owner. A dual obligee rider names both. It has to be requested; it is not automatic, and it usually needs the surety's approval.

Get the obligee details exactly right

The obligee's legal name and address are printed on the bond, and a bond made out to the wrong entity does not satisfy the requirement. This is the single most common reason a bond has to be reissued and a filing deadline gets missed.

Take the obligee name from the source document — the statute, the licence application, or the contract — rather than from what the client remembers. "The city" is not an obligee name. "City of Henderson, Department of Business License" is.

Related: What is a surety bond? · How bid and performance bonds work together

Educational only — confirm against the actual bond form and the obligee's requirements.