Definition - What does Surety Bond mean?
A surety bond is a bond that is written by a surety company on behalf of a principal to cover any losses sustained by the third party in the agreement (the obligee).
Surety bonds are legally binding and are used in many industries. However, it is usually the construction industry that uses surety bonds the most frequently.
Justipedia explains Surety Bond
The surety bond comes into play if the principal, which is often a construction company, fails to perform the required work correctly and causes losses for the obligee, which is often a developer. In such cases, the surety bond—provided by the surety company—would go to the developer to be cashed so that the developer could recoup his or her losses in the investment.
Surety bonds are very similar to insurance in that they are designed to prevent losses.