What does the penal sum refer to in a surety bond?

The penal sum in a surety bond refers to the limit of liability established within the bond agreement. This is the maximum amount that the surety company agrees to pay in the event that the bonded principal fails to fulfill their obligations. Essentially, if the party who is bonded defaults on their commitment—such as completing a construction project or meeting the terms of a contract—the surety will cover losses up to the penal sum. This provides financial protection to the obligee, the party requiring the bond, ensuring they can recover a predetermined amount should there be a breach.

The other concepts, while related to insurance and bonding, do not align with the definition of the penal sum. The maximum amount of premium would refer to payment obligations and not liability coverage. The cost of underwriting the bond pertains to the risk assessment and pricing process prior to bond issuance. The deductible under the bond would imply a portion of loss that the bonded party retains and does not relate directly to the bond's liability limits. Thus, understanding that the penal sum specifically designates the liability limit clarifies its fundamental role in surety bonds.