Bond insurance is a type of insurance where an insurance company guarantees scheduled payments of interest and principal on a bond or other security in the event of a payment default by the issuer of the bond or security. Additionally, it is a type of insurance policy that a bond issuer purchases that guarantees the repayment of the principal and all associated interest payments to bondholders in the event of default. Moreover, bond issuers buy insurance to enhance their credit rating in order to reduce the amount of interest that it needs to pay.
There are three different party agreements that legally bind together:
- A principal who needs a bond obligee that requires the bond
- A surety company that sells the bond. If the principal fails to perform in this manner, the bond will cover resulting damages or losses.
- A bond is a contractual agreement where the bond underwriter agrees to pay any claims made against the bond.
Although it’s like insurance, there’s no key difference. Bond can be required by the state or a business client. Additionally, this insurance are required by private industry, municipalities, states, and the federal government for making sure that the principal abides by the governing laws as well as policies or a contract. Bond Insurance helps repay bond issuers the principal and all associated interest payments to bondholders in the event of default.
Types of Bond Insurance
- Judicial bond
- Contractor’s bonds
- Reconstituted bond
- Guarantee payment bond
- License and permit bond
- Fidelity bond
- Indemnity bond