At its most basic definition, a bond is a legally binding contract between three parties that ensures certain contractual obligations will be met. This is different from insurance, where the contract is only between two parties (the insurance company and the insured). Those three parties are known as the Obligee, the Principal, and the Surety.
The Obligee is the legal authority that requires the bond (typically, this is a government agency)
The Principal is YOU, the business or the individual that needs the bond to perform the work.
Lastly, the Surety is the company that backs the bond and guarantees that you as the Principal can fill your obligations.
Another easy way to think about Surety Bonds would be to compare them to a bank underwriting a loan to a client, the Bank being the Obligee, a Co-signer being the Surety, and the Loan recipient being the Principal. After all, Bonds are a credit product.
Just like insurance, there are different kinds of bonds out there and you may need a specific type to fulfill your contractual obligation. The four main types of Bonds are: License and Permit bonds, Contractor Bonds, Fidelity Bonds, and Court Bonds.
License and Permit Bonds are usually tied to a permit or license to do work, and typically are the laws the Principal needs to abide by when doing that work. (Contractors working on Municipal projects usually needs this type of bond as well as the next type)
Contract Bonds, as mentioned above, are also needed when working on municipal projects as well as on some private jobs. These types of bonds ensure the project or job will be completed.
Fidelity Bonds provide protection for you or your clients from dishonest employees who may commit theft, embezzlement, etc. Janitorial companies typically use these.
Finally, Court Bonds are the type of bonds that ensures the principal will fulfill responsibilities as ordered by local, state, or federal courts.
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