A surety bond, or suretyship, is a specialized line of insurance that occurs when one party guarantees performance of an obligation by another party. The surety bond is a written agreement that the party undertaking the obligation will act as promised or a claim against the bond can be filed that can provide for monetary compensation. The guarantee involved depends on the bond type and there are hundreds of bonds for many different occupations. There are three parties that are involved in every surety bond- the principal, the surety and the obligee.
- Principal- the principal is the party that undertakes the obligation.
- Surety- the surety, often known as the surety bond company, is the party that guarantees the obligation will be performed.
- Obligee- the obligee is the party who receives the benefit of the surety bond.
Surety bonds generally fall into one of the two following categories – contract or commercial surety bonds. There are many different types of surety bonds, but they can generally fall into one of the above-mentioned categories.
Are Surety Bonds Like Insurance?
The similarities in surety bonds and insurance are thin. Both are risk transfer mechanisms and provide for financial loss but the similarities end there. The risk in surety bonds is with the surety, but the surety tries to minimize these risks with indemnities. Surety bonds are a guarantee from the surety company to the obligee that the principal can perform how they say they will and live up to the terms as defined in the agreement. They essentially provide the principal incentive not to have claims in the first place as the surety is responsible for paying claims and then collecting from the principal whereas an insurance company would cover the person paying for the coverage.
What is a Surety Company’s Underwriting Criteria?
Every surety company is different in this regard however there are some basic factors that are common in underwriting. The following are some general surety underwriting criteria, otherwise known as the three c’s: Capital, Character and Capability.
- Capital– The financial condition of the applicant it terms of their ability to pay back a claim should one occur.
- Character– The character of the applicant to be able to carry out the obligation he or she is trying to perform.
- Capability– The capacity of the applicant to perform the obligation.
Who Can Write Surety Bonds?
If a company is seeking the ability to write surety bonds in the United States, it is generally required that they are licensed in the state in which they are doing business or by the state in which the obligation guaranteed by the bond is being performed.
To learn more about surety bonds contact Cinium today.