A surety bond is a contract between three parties that is often intended to keep one of the parties accountable to another. Although surety bonds are not insurance and differ in their use and technical aspects, both are designed to protect against losses.
Government officials may be required to purchase a surety bond upon taking office. If the public official does not fulfill his or her official duties, the surety company will pay up to the bonded amount to the appropriate government. Unlike insurance, the public official must repay the surety company for the total amount of the government’s claim.
With regard to municipal bonds, surety bonds may be used to guarantee funds for a debt service reserve fund in lieu of funding it with cash (whether from additional bond proceeds or the issuer’s other revenue). If money must be drawn from the reserve fund, the company providing the surety bond will provide the funding, up to a predetermined amount to be repaid at a later date by the issuer.