by 
The Curious Bag
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Surety bond insurance is a misnomer. A surety bond is not insurance. It's actually a form of credit that serves as an agreement among three parties.
Fact
A surety bond is a three-party agreement in which one party guarantees to back up a second party if said party is unable to meet a contracted obligation.
Features
A surety bond requires three parties. The first is the obligee, or the person requesting the bond. The second party is the principal, or the person promising to carry out the obligations of the contracted bond. The third party is the surety company, which provides the surety bond for the principal.
Benefits
A surety bond guarantees the agreed-upon work will be performed according to a contract's terms.
Function
If the principal doesn't fulfill the contracted obligations, the surety company pays the bond to the obligee. The surety company will then hold the principal responsible for any losses suffered as a result of paying the bond.
Types
There are surety bonds for just about every commercial contract, including beer bonds for alcohol sales, administrator bonds to guarantee an administrator's duties, and employee bonds that cover losses due to employee behavior.
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