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A bond is a legal contract that involves three parties: (1) The bonded party (the client seeking the bond), also called the Principal, (2) the obligee or the party that is requesting the bond from the client or the one who is the recipient of an obligation, and (3) the surety (insurance company), also called Obligor who assures the obligee that the principal can perform the task.

It is important to understand that the bond is not an insurance policy. Bond pays for damages due to not meeting conditions, lack of completion, a dishonest behavior, etc. Insurance pays for damages because of an accident.

A surety bond, for example, is a guarantee that the Principal in the bond, will perform the "obligations" as stated in the bond contract. For example, these obligations can be completing a project on a specific date, performing certain tasks according to village codes, etc. Once the Principal has met the conditions, the bond becomes "void". The language of the bond normally holds both the Principal and the Surety the responsibility to meet the terms of the bonds, jointly and severely - meaning that the Obligee could go after either party or both party in the event of not satisfying the terms of the bond.