Surety is a promise made by one party (the guarantor) to assume responsibility for the performance obligation of another, if that party defaults. Essentially there are three parties involved in the agreement: the principal is the party that undertakes the obligation; the surety company guarantees that the obligation will be performed; and the obligee is the party who receives the benefit of the guarantee. Surety is similar to insurance in that surety and insurance are both methods of transferring risk and providing for financial loss. The difference, however, is that in a surety arrangement the risk remains with the principal. If the principal fails to perform its obligation, a written surety bond agreement usually provides for monetary compensation to the obligee from the surety company.
The use of surety as a tool of protection goes back thousands of years to the Mesopotamian region (largely corresponding to modern-day Iraq), as evidenced on a tablet discovered which was written around 2,700 BCE. Even the Bible reveals the use of surety as a contract of safeguard in ancient societies. For it is recorded in the book of Genesis, “ I will be surety for him; of my hand you shall require him. If I do not bring him back to you and set him before you, then let me bear the blame for ever.” (Gen.43: 9)
What role does surety play in today’s world? Surety bonds are issued to secure against the failure of promises made in the daily business of a society. It touches on such diverse endeavors as a state highway construction job, the installation of utilities in a new housing project, the regulation of import laws, and the authorization of bail bonds. Here in the United States there are thousands of different bonds available to protect the innumerable business transactions that are made every day in our nation. An argument can be made that the orderly functioning of a nation is built on the guarantees that surety provides.