If you aren’t familiar with surety bonds and how they work, you have probably not heard the terms obligee and obligor. This discussion will provide some background on those terms, and on the importance of surety bonds in driving many of the biggest industries in the country, providing a guarantee of quality workmanship so that relevant standards can be adhered to, and finished products measure up to whatever regulations have been imposed on workmanship in a given industry. By the end of reading this, you will have a better understanding of what is an obligor.
The obligor party in a bonding arrangement is one of three parties that are all part of a contractual agreement that binds them together. The bond itself is actually sold by the obligor to a principal, generally, a contractor or subcontractor who has agreed to perform some action or body of work for a hiring entity, known as the obligee in the arrangement. Most industries in this country make use of bonds, because of their inherent usefulness of providing assurance that a contracting party will meet the terms of quality, timeliness, and compliance which are detailed in the bond’s terms.
How Bonds Work
Bonds, as stated above, are a contractual agreement in which three parties are involved, and the net result of purchasing such a bond to cover a body of work is that it acts as a kind of insurance for the party which needs some kind of work to be completed. Without a surety covering the task or the project, the owner or manager of the project would have no guarantees at all that individuals or companies hired to do the work would even complete it.
Bonds list a set of conditions that the project manager requires to be met in order for the work to be considered complete and satisfactory, in order for persons hired to be paid properly for their efforts. Sometimes there are local regulations and laws governing construction which must be adhered to, and sometimes the project manager will require specific terms of completion as well.
Sureties purchased from an insurance carrier for such a project will provide some measure of assurance that those terms will be met by contractors, and if they are not completed as agreed to, the project manager would be entitled to make a financial claim against the bond, to recover the amount of any damages suffered by the unsatisfactory work.
What Does the Obligor Do?
The effectiveness of sureties is that they force, or at least strongly motivate, a contractor to live up to the terms agreed to in a bond, regarding workmanship and compliance. In effect, a bond acts as insurance for the hiring party that high-quality work will be done on a project and that it will be completed on time, in accordance with any imposed rules, regulations, or laws which are in effect locally.
If the contractor fails to meet these terms which have been agreed to, then the hiring party would have the right to claim financial restitution against the bond, and while the initial payments would be issued by the obligor party, the obligor would then seek reimbursement from the contractor who failed to live up to the bond terms. In this case, the contractor bond thus creates a kind of balance between the three parties, with each depending on the other two for certain actions to be fulfilled satisfactorily, and in the vast majority of cases, this is what actually happens.
What are the roles of the parties involved?
The three parties in a surety bond contract are the principal (usually a contractor), an obligee (a hiring company), and an obligor meaning (a financial company). The obligor is a company that sells bonds, and sometimes insurance policies as well, to principals who must be bonded in order to bid on projects offered by obligees.
After selling a bond to a principal, the obligor’s role is complete, unless a situation arises where the obligee makes a claim against the purchased bond for whatever reason, and in that case, the obligor would have to pay out some amount of money suffered as damages by the obligee (assuming the claim was determined to be valid).
The obligee’s role in the arrangement is to provide a body of work to be completed and to hire a specific contractor who has purchased a bond for the work to be done. The obligee would also establish whatever terms the contractor is required to meet in order to fulfill his promise of quality work.
The contractor or principal in the agreement buys the necessary bond, and either complete the terms listed in that bond or does not. However, if the principal does not live up to the agreed terms, he would suffer reputational damage, and would also be pursued by the obligor for reimbursement of the claim paid out.
Types of Bonds
There are two basic categories of bonds:
- Contract Bonds – These include the sub-types of bid bonds, performance and payment bonds, site improvement bonds, and a few others which are largely specific to the construction industry.
- Commercial Bonds – Practically all other sureties fall into the commercial category, which includes literally hundreds of specific kinds of bonds. Some examples of commercial bonds include: license and permit, ERISA bonds, fidelity bond, fiduciary, notary, probate court, and public official bonds.
Industries which require bonds:
Because they provide at least a measure of assurance that stated work requirements will be fulfilled by persons hired for that work, surety bonds have universal application and are therefore used in conjunction with almost every industry in the country. By far the two largest users of bonds though, are the various levels of government agencies, and the construction industry.
Government agencies are obliged to account for taxpayers for work done on projects, and that makes bonding very important for accountability. These are called tax bonds. The same is true for the construction industry, where chaos would result if all the subcontractors at work on large projects were not held accountable for the work done, and for fulfilling terms of compliance, timeliness and quality workmanship.
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