What is the primary purpose of a surety bond?

The primary purpose of a surety bond is to guarantee payment for completed work in case of non-performance. A surety bond involves three parties: the principal (the contractor), the obligee (the project owner), and the surety (the bonding company). Should the principal fail to fulfill their contractual obligations, the surety steps in to cover the financial loss incurred by the obligee, up to the limit specified by the bond. This mechanism ensures that project owners have assurance and protection that the work will be completed as agreed, providing a safety net that supports the project's financial integrity.

In contrast to the correct answer, while providing additional insurance coverage may seem beneficial, a surety bond serves a distinct function focused specifically on the performance and financial guarantees related to contractual obligations. It does not provide broad insurance coverage for various risks a contractor might face or cover legal costs associated with disputes, which belong to other insurance types. Additionally, surety bonds are not directly related to licensing compliance, which pertains more to regulatory requirements rather than performance guarantees in contractual agreements.