Every surety bond establishes a legally binding contract among three parties referred to as the “obligee,” the “principal,” and the “surety.”
- The obligee is the state’s lottery commission or other state entity requiring the bond.
- The principal is the lottery retailer required to purchase the bond, and
- The surety is the bond’s guarantor.
The obligee determines when a lottery bond is required and the required bond amount, then establishes the rules to follow to avoid claims against the bond. The principal must comply with those rules and is legally obligated to pay all valid claims for damages. The surety sets the premium rate for each applicant, investigates claims to determine their legitimacy, and guarantees their payment.
Because of that guarantee, the surety will pay a valid claim initially, to be reimbursed by the principal. Both the surety and the obligee are indemnified against any legal responsibility for damages caused by the principal.
The cost of a lottery bond is the product of multiplying the bond amount required by the obligee and the premium rate set by the surety. With this, the better the principal’s credit score, the lower the premium rate. An average rate for those with good credit is between one and three percent.