Georgia Adjuster Practice Test

Which of the following statements is NOT TRUE regarding surety bonds?

1. They provide protection against loss.

2. They require a premium payment.

3. They do not involve indemnity.

4. They are an agreement involving three parties.

The correct answer is: They do not involve indemnity.

Surety bonds are unique in their structure and purpose, serving to guarantee the performance or obligations of one party to another. The statement indicating that surety bonds do not involve indemnity is accurate. In a surety bond, if the party whose performance is guaranteed fails to meet their obligations, the surety (the bonding company) is responsible for the financial loss. However, the party that defaults is still obligated to repay the surety for any losses incurred, which introduces the concept of indemnity into the relationship—contrary to the assertion that it does not involve indemnity. Additionally, surety bonds protect against losses incurred due to defaults, they do require the payment of a premium, and they indeed involve three parties: the principal, the obligee, and the surety. The principal is the party whose obligations are being guaranteed, the obligee is the entity seeking assurance that the principal will fulfill their obligations, and the surety is the entity providing the bond. Hence, affirming that surety bonds do not involve indemnity is accurate since the nature of these bonds indeed incorporates the indemnity principle.