There are three parties to an Iowa contractor license bond: the obligee, the principal, and the surety.
- In most states, the government licensing authority requiring the bond is listed as the “obligee” but in Iowa, the obligee for the bond must be listed as the customers of the principal, using language such as “licensee’s Iowa customers” or “person(s) injured by Principal’s breach of construction contract.”
- The contractor purchasing the bond is called the “principal.”
- The bond’s guarantor is referred to as the “surety.”
Any violation of the terms of the surety bond agreement, such as failing to meet local building codes or defaulting on a construction contract, can result in the affected customer filing a claim against the bond. The bond allows the injured party to be compensated for monetary damages. The surety investigates each claim to make sure it is valid, and the principal is legally obligated to pay all valid claims.
The surety, in guaranteeing an Iowa contractor license bond, is agreeing to extend credit to the principal if the principal cannot pay a claim immediately. The surety will pay the claim initially as a loan to the principal, which the principal must repay within a certain amount of time. If the debt is not repaid on schedule, the surety can take legal action against the principal to recover the funds.