An obligor is the party legally bound to fulfill an obligation under a contract or agreement. In the context of surety bonds, the obligor is typically the principal — the individual or business that must comply with specific terms, such as adhering to state regulations or completing contractual duties. If the obligor fails to meet these obligations, the obligee (the entity requiring the bond) can file a claim, and the surety company will cover valid claims, with the obligor ultimately responsible for reimbursing the surety. Understanding the role of the obligor is essential for managing risk and maintaining compliance in financial and bonding arrangements.
How Surety Bonds Work
Surety bonds, 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.
Understanding the Three Parties in a Surety Bond Agreement
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, and notary.
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.
How NFP Can Help
NFP is among the largest surety companies of its kind and is authorized to issue bonds in all 50 states. Use the form below or call us directly at 866-540-4002 to get started. Our team will walk you through the bonding process, help you choose the right bond for your business, and provide a fast, competitive quote. Don’t hesitate to ask us questions during the process; part of our job is to guide you through the application, especially if you’re a first-time applicant. We pride themselves on helping small businesses get bonded by explaining the process and requirements clearly.
