What are surety bonds?
In its simplest form, a surety bond is a written agreement, often required by law, to guarantee performance or payment of another company’s obligation under a separate contract or compliance with a law or regulation. There are three parties to the agreement:
The Principal undertakes the obligation.
The Surety guarantees the obligation will be performed.
The Obligee receives the benefit of the bond.
A surety bond usually provides for monetary compensation in case the principal fails to perform the acts as promised. There are many different types of surety bonds, but the two general categories are contract and commercial surety bonds.
Contract Surety
Contract surety bonds are primarily used in the construction industry and may be required by the government or private developer of a construction project to ensure the contractor is qualified and able to complete a project in a timely manner. The contract surety bond also ensures the contractor will pay all subcontractors, suppliers and other workers to complete the project. The three types of contract surety bonds are – a bid bond, a performance bond and a payment bond. Federal and state construction projects generally require a contract surety bond.
Commercial Surety
Commercial surety bonds protect the public (consumers) against fraud, misrepresentation and financial risk and are typically required by federal courts, government bodies, financial institutions and private corporations as part of a company’s licensing processes. Examples include license and permit bonds, court bonds, fiduciary bonds, and more.
How does a surety underwrite?
Each surety company has its own guidelines and underwriting criteria. However, the following basic factors will be taken into consideration in some format.
CAPACITY
Does the applicant have the skill and ability to perform the obligation?
CAPITAL
Does the financial condition of the applicant justify approval of the particular risk?
CHARACTER
Does the applicant's record show them to be of good character and likely to perform the obligation he or she assumes?