Home Contact Us Client Services: Login Information Request Form Specialty Programs: General & Trade   Contractors Home Builders Commercial Firms Mortgage Brokers &   Lenders Public Officials &   Notary Publics Insurance Agencies Firm Profile: Overview Management Team Why Us General Information on Bonding: Basics of Surety Bonding Bond FAQ's for Contractors Case Studies Surety News Surety Bond Product List RKA Newsletters: Subscribe for Electronic   Delivery via E-Mail Recent Newsletters Complete List & Index Owner/Obligee Services: Bond Validation Why Bond a Project?	Surety Bonding Basics (FAQ) By law, most publicly-funded entities are required to protect the financial interests of the public by requiring some form of "guarantee" of the other party when executing a contract for services with the other party. This "guarantee" is most commonly met by providing a Performance & Payment Bond, which provides the promise of a trusted third to step in and complete the obligation without adverse financial impact to the public. Private entities also find it to their advantage to specify a Performance & Payment Bond on their projects - doing so allows them to safely entertain proposals from a far broader base of bidders and/or respondents than otherwise would be possible. What follows are answers to some commonly asked questions regarding Surety Bonding. Of course, our licensed representatives are available to answer any other specific questions you may have. What is Surety? Surety is a very specialized line of insurance that is created whenever one party guarantees performance of an obligation by another party. There are three parties to the agreement:         The principal is the party that undertakes the obligation.         The surety guarantees the obligation will be performed.         The obligee is the party who receives the benefit of the bond. What is a Surety Bond? A surety bond is a written agreement that 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. Is a Surety Bond the same thing as an Irrevocable Letter of Credit? Not really. In the case of the Irrevocable Letter of Credit (ILOC), the obligee may draw the funds provided in the ILOC in the event of default or other failure to perform, but can still be left with a challenging project completion effort. In the case of a Surety Bond, the surety has clear financial incentive to minimize their exposure and loss. In most cases, these interests are best served by working closely with the obligee to most expeditiously complete the project. For a full discussion of this issue, click through to an article prepared by the Surety Information Office. What characteristics of suretyship are like more common forms of insurance?         They are both risk transfer mechanisms.         State insurance commissioners regulate them both.         They both provide for financial loss. How is suretyship different from more common lines of insurance? In traditional insurance, the risk is transferred to the insurance company. In suretyship, the risk remains with the principal. The protection of the bond is for the obligee. In traditional insurance, the insurance company takes into consideration that a certain amount of the premium for the policy will be paid out in losses. In true suretyship, the premiums paid are "service fees" charged for the use of the surety company’s financial backing and guarantee. In underwriting traditional insurance products the goal is "spread of risk." In suretyship, surety professionals view their underwriting as a form of credit so the emphasis is on prequalification and selection. 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 him to be of good character and likely to perform the obligation he or she assumes? What is Personal Indemnity? It is common for a surety to request the indemnity of the owners of a closely held corporation. Typically, the spouse’s indemnity also is required because personal assets are jointly owned. The two main reasons for this requirement are that the surety requires all personal assets to be available to back the guarantee and that there is less chance a principal will avoid its responsibilities if its personal assets are at stake. Why such an emphasis on "Related Entities"? Related entities can include other businesses or proprieterships owned, operated, or controlled by the primary firm or it's owners. Where such related entities exist, the surety typically underwrites based on the overall reputation and financial strength and performance of the the extended family. The surety may also request that cross-entity transactions be consolidated or eliminated, and may also request subordination or indemnification from or by the related entities. How does collateral security relate to a surety bond? If an underwriter is unable to approve a bond request based on the qualifications given by the principal, the company may suggest depositing some form of collateral as an inducement to write the bond. In practice, many bonds are written on this basis, particularly ones that are considered financial guarantees. What is a financial guarantee bond? A financial guarantee bond obligates the surety to pay a certain amount of money if the principal does not perform its obligation. Examples include tax bonds and Medicare and Medicaid bonds. These bonds are extremely hazardous and very carefully underwritten.
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