suretyship

In law, suretyship, now more commonly referred to as a guaranty, involves one party assuming liability for the obligations of another. This can range from ancient practices where a surety was held hostage to modern business corporations that issue bonds. These bonds protect against financial losses due to embezzlement or contract failures, functioning similarly to insurance.1

A surety contract typically involves three parties: the principal (the person whose obligation is covered), the obligee (the party protected), and the surety (the entity assuming the risk). Unlike insurance, which covers random events, surety bonds cover failures within the principal's control, such as a contractor's inability to complete a project. The surety has the right to recover losses from the principal, and bonds are generally not cancelable by the insurer. Various types of surety bonds exist, including contract construction bonds, court bonds, official bonds, and license bonds.2