Unlike an insurance policy, in which there are two parties to the agreement — the insurer and the insured(s) — a surety bond is a three-party agreement consisting of the principal (the party whose obligations are being guaranteed by the surety company), the obligee (the party requiring the bond and who is also the beneficiary of the bond), and the surety company (typically a unit of a multi-line insurer but can also be a specialty provider focusing exclusively on bonds). A surety obligation has similarities to an extension of credit by a bank as a borrower’s (or principal’s) obligations under a loan are guaranteed by a co-signor (the surety) to the benefit of the bank (the obligee)
There is an important distinction between a surety bond and insurance. A bond is a guarantee that the principal will perform the obligations detailed in the bond form and in any other documents incorporated by reference, such as a statute or a construction contract. Failure to completely perform all the obligations guaranteed by the bond (or incorporated documents) could result in a claim being made by the bond obligee for default. In the event a claim is filed, the surety company has a duty to determine whether the principal is in default and typically will begin an extensive investigation. The principal has a duty to cooperate with the investigation and maybe required to reimburse the surety company for costs associated with the determination.
It is also important to understand that the principal (e.g., Harvard University) is legally obligated to reimburse (indemnify) the surety for any and all loss incurred by the surety under the bond. Such loss costs, which may include attorney fees, will be assessed back to the tub and department requesting the bond.
There are many different types of bonds. The most common ones utilized at Harvard include:
- License and Permit bonds
- Right-of-way (sign or sidewalk) bonds
- Construction / contract bonds
- Fidelity (crime) bonds
License and Permit bonds – sometimes required by a municipality (typically the City of Cambridge) or other public body as a condition to granting a license or permit to engage in a specified activity. It guarantees that the party seeking the license or permit will comply with applicable laws or regulations. These bonds are structured to provide indemnity guarantees to third parties who sustain injury or damage as a result of the party’s activities (as described in the license or permit). Examples include guarantees for injuries to pedestrians from businesses that hang signs over public sidewalks.
Right-of-way (sign or sidewalk obstruction) bonds - required in order to secure a permit for right-of-way work along streets, highways or other public roadways. The permit is typically required by a city, county, or other local municipality for excavation, grading, sidewalk, encroachment, maintenance or other roadway work projects. Permit and right-of-way surety bonds ensure work is completed in compliance with local rules and regulations along with job specifications and other contractual terms.
Construction (a.k.a. contract) bonds – required to guarantee that a contractor will abide by the specifications of a construction job or contract. The bond ensures to the project owner that the contractor will perform the work and pay specified subcontractors, laborers and material suppliers. Subcategories of construction bonds include bid, performance and payment, prequalification, payment, supply, and maintenance.
Fidelity (a.k.a. crime) bonds – protects clients and consumers from theft by the principal or their agents/employees related to fraud, forgery, alteration or embezzlement of funds. This bond might be required for Harvard personnel collecting/managing funds or processing payments on behalf of another party.
Departments being asked to post a surety bond by a municipality, business partner, or other external party can submit an electronic request here. [requires Harvard PIN]