Surety Bonds are a three-party agreement between a principal, obligee and surety. A fourth party, the broker, is often involved as well. Learn about the parties and what their roles and responsibilities are.
The principal is the party performing the obligation. This obligation can be complying with laws and ordinances, completing a contract, paying subcontractors and suppliers or many other types of guarantees. The principal is the party of whom the bond is required. In most cases, the principal is also the party that is paying for the bond.
The principal must provide underwriting information to the surety bond company. This information typically includes items such as company financial statements, personal financial statements, background and information on the individual or company, bank information and information on the obligation being bonded.
One of the most important duties of a principal is to complete the promise to the obligee that is being bonded. Obtaining a bond does not excuse the principal from any of the requirements of the obligation. Although a surety bond company is standing behind the obligation, the expectation is that there will not be a bond claim against the principal.
A third duty of the principal is to sign an indemnity agreement with the bond company. This agreement is often referred to as a General Indemnity Agreement (GIA). The GIA outlines the principal’s obligation in the event of a bond claim. As part of this agreement, the principal is always required to reimburse the surety bond company for any loss that it may occur as part of providing bonds to the principal.
The GIA also outlines other responsibilities to the principal. The principal is generally required to open their books to the surety bond company when requested. Most GIAs also require the principal to post collateral to the surety bond company if a claim occurs and if the surety bond company requests it. Finally, many GIAs require the principal to take steps to reduce the surety bond company’s loss when a claim occurs.
The principal is the party required to pay for the bond. Even when the obligee agrees to pay or reimburse the principal for the cost of the, the principal is ultimately responsible to the surety bond company for payment.
The obligee is the party that is benefitting from the surety bond. This can be directly or on behalf of another party, as is the case with some license bonds. The obligee is also the party requiring the bond and setting the bond amount. The obligee is typically a project owner, government entity, lender, developer or other interested party.
Duties of the obligee can vary by bond type.
In contract surety bonds, the obligee must make payments and live up to their other duties under a contract, or it may be a valid defense for defaulting on the surety bond. Other types of bonds may have similar requirements like requiring the obligee to provide services.
For many surety bonds, the obligee must allow the surety to cancel the bond by meeting certain notice requirements. This is common for commercial surety obligations. Contract surety bonds generally cannot be canceled.
Most surety bonds require that the obligee give the surety bond company time to investigate claims. Some surety bonds and contracts are very specific about the time frame allowed while others require “reasonable” time.
The Surety Bond Company is a corporation providing a guarantee to the obligee that the principal will fulfill their obligation to the obligee. The “Surety” is the party whose financial strength the obligee is counting on. While the obligee may have very little information on a principal, sureties are rated by independent companies to determine their financial strength and claims paying ability.
The Surety also has several important duties to each party.
The surety’s primary duty is underwriting the principal and the obligation. The surety takes the underwriting information provided by the principal and qualifies the principal. The surety will either accept or deny the principal’s ability to perform the obligation of the bond.
If the surety accepts the principal as a customer, the surety must provide the bond and stand behind the obligation. If the principal defaults on an obligation, the surety will have to pay the claim or complete the obligation.
It is the surety’s duty to investigate claims when they occur. The surety should take reasonable steps to make sure that claims are investigated in a thorough and cost-effective manner. The surety should also take steps to make sure that claims are resolved as quickly as possible.
It is the surety’s responsibility to bill the principal for each bond for the agreed upon rate. This responsibility includes returning premium when necessary.
It is the surety’s responsibility to create the indemnity agreements and terms of the surety relationship. Additionally, it is the surety’s responsibility to make sure all required indemnities are posted.
The information above is related to Corporate Surety Bond Companies. Some obligees including the U.S. government may accept bonds from Individual Surety Bond Companies. These companies have a history of fraud and questionable practices. The information above may not apply to individual sureties.
The Broker is not a party to a surety bond but is usually heavily involved. A bond broker is a licensed company or individual who acts as an intermediary between the principal and the surety.
The principal usually relies on the broker for advice and in selecting the proper surety. The surety relies on the broker to sell their bonds, collect information and communicate with the principal. In return, the surety pays the broker a commission on the surety bonds that they write.
In many cases, the surety will also provide the broker with a power of attorney and the company’s seal so that the broker can issue bonds approved by the surety company. The broker is also typically responsible for collecting bond premium on behalf of the surety. Having a broker speeds up the issuance of bonds for both the surety and the principal.
All parties to a surety bond have important roles and responsibilities to each other. Interested parties can learn more about surety bonds by visiting our Complete Guide. Contact the experts at Axcess Surety today for all your questions and bond needs.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
