What is a primary risk that surety bonds protect against?

Surety bonds primarily protect against the risk of default on contractual obligations. The essence of a surety bond is that it is a three-party agreement involving the principal (the party responsible for fulfilling the contractual obligation), the obligee (the party that requires the bond as a form of security), and the surety (the entity that issues the bond and guarantees the principal's performance). If the principal fails to meet their contractual obligations, the surety is responsible for compensating the obligee for any losses incurred.

This function is essential in various industries, particularly in construction, where contractors must fulfill specific performance criteria. The surety bond reassures the obligee that the project will be completed according to the terms set out in the contract, thus minimizing the risk of financial loss due to non-performance. Other risks, such as natural disasters, theft, or health-related claims, fall outside the scope of what surety bonds specifically address.