A
contract under which a
person or a company agrees
to pay to another a
specified amount at
pre-determined point.
The
simplest way to demonstrate
a surety bond is by looking
at an insurance contract, an
auto insurance policy may
state that if the insured
gets into an accident they
insurer will pay out a sum
stated in that policy. The
insurance company before
issuing a policy, must
assess the the risks
(driving records) in order
to determine what premiums
to charge the insured.
There are two main
categories of bond types:
contract bonds and
commercial bonds. Contract
bonds guarantee a specific
contract. Examples include
performance, bid, supply,
maintenance and subdivision
bonds. Commercial bonds
guarantee per the terms of
the bond form. Examples
include license & permit,
union bonds, etc.
A key term in nearly
every surety bond is the
penal sum. This is a
specified amount of money
which is the maximum amount
that the surety will be
required to pay in the event
of the principal's default.
This allows the surety to
assess the risk involved in
giving the bond; the premium
charged is determined
accordingly.
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