New Jersey surety bonds play an important part in the proper execution of the contract of a construction company (the principal) toward the client (the obligee). This is guaranteed by the surety, the company, usually and insurance company, which issues the surety bond. The client who is receiving the benefit of the surety protection is motivated to word the salient contract in a way that demonstrates the ability of the principal to perform the contract. The process is designed to reduce the risk that the surety bond will need to be invoked.
The premiums of the bond are borne by the principal who will usually pay a premium annually in exchange for the financial strength of the surety and its ability to extend surety credit. The first step after a claim is made is validation, and if the investigation verifies a valid claim, then the surety pays the associated costs to the obligee. In turn, the principle seeks to recover those costs from the principal for both the amount of the claim and the associated legal fees.
If the principal defaults on the contract and the surety becomes insolvent, then the purpose of the bond is rendered null and void. To prevent this situation the insurance company who issue the surety bond is carefully scrutinized by private audit, government regulation, or both, to ensure solvency. In this way New Jersey surety bonds will perform appropriately.