What does surety company guarantee?

[Redbull]

What role does the surety company play? What will happen if a claim is filed? How will they back me?

[Admin]

The surety offers their financial strength to guarantee the bond. In other words they make a promise of your performance. If a claim is filed the surety is responsible to pay out on the bond. However, the surety will look back to your for repayment of losses, as bonds a form of credit, not insurance.

[Surety Insider]

Here is a real-world situation providing an example of the surety relationships Admin has described.

In this case, the oil company's performance was guaranteed by the financial strength of the surety in the event of its failure to supply the oil as it had contracted and been pre-paid to do. Instead, it abruptly closed , leaving 12,000 frosted customers out in the cold, just in time for March in Connecticut. This is where a surety bond comes in handy.

The article indicates that the Attorney General (AG) of Connecticut, acting on behalf of the customers pursuant to a "law" (usually a statute or regulation), can facilitate customer refunds to be paid by the surety instead of the (now defunct) oil company. This is the risk the surety assumes and for which it accepts a premium.

Using this law, the state requirement thereby facilitates an efficient refund mechanism for the customer with minimal impact upon the legal system. What might have been 12,000 separate time-consuming, costly and burdensome lawsuits becomes just one surety bond claim by the AG on their behalf.

Assuming the bond claim by the AG is valid and paid by the surety, it may then pursue its own recovery against the oil company it had guaranteed (called indemnification.) The surety is typically in a much better position to pursue these protracted efforts than the average consumer, again increasing economic efficiency.