Frequently Asked Questions about Surety Bonds are Answered Below:
A surety bond is a three party guarantee between a Principal (the party making the guarantee) the Obligee (party receiving the guarantee) and a Surety (the third party bond company backing the Principal’s guarantee).
Contract Bonds are mandated on all Federal projects over $150,000 through the Federal Miller Act. Most states and municipalities have enacted similar requirements when public funds are involved. Private Owners and General Contractors also frequently require these bonds as a way to manage their project risk.
Commercial Surety Bonds are the second major category of Surety Bonds. Commercial Surety Bonds encompasses many sub categories. These include License and Permit Bonds, Court Bonds, Public Official Bonds and Miscellaneous Bonds.
Fidelity are the third major category of Surety Bonds. Fidelity Bonds include Erisa Bonds, Financial Instituion Bonds and Employee Dishonesty Bonds.
Despite what you may think or read, Surety bonds are not insurance. In fact they are quite different products.
Surety is a credit product. It is more closely related to banking than insurance. A company or individual must qualify financially to get a Surety bond. Additionally, they must agree to reimburse a Surety bond company if a loss occurs under the indemnity agreement.
Surety also assumes no losses and is priced accordingly. Surety Bonds would be unaffordable if they were priced like insurance policies.
Alternatively, property and casualty insurance is not based on financial underwriting. It is offered and priced according to a company’s industry, the expected losses for that industry, and the company’s own loss history. Insurance pricing includes a certain amount of expected losses.
If a loss does occur, a company or individual is usually only financially responsible up to a deductible and coinsurance.
It is easy to understand why there is confusion. Property Casualty insurance companies are often the same companies that write surety bonds. Both products are regulated by the Department of Insurance and the same licensing is required to sell both.
However, few insurance professionals truly understand surety bonding and vice versa. Surety Bonds are not insurance and should not be treated as such by any party.
It really depends on the type of obligation and the size of the Surety bond. Many bonds can now be issued instantly with a simple personal credit check.
Larger surety bonds and Bond programs require full underwriting. This includes collecting both company and individual financial statements, applications, resumes, job schedules and other underwriting information. Contract Bond underwriters look at Character, Credit, and Capacity. You can read more about that here.
Generally surety bonds are obtainable even with bad credit or other credit blemishes. In instances where an individual or company has strong financial resources, and a history of success, it may be very easy to obtain a Surety bond.
Generally the most difficult situations involve tax liens. The U.S. Government will take priority over other creditors so tax liens will usually need to be paid or full collateral will likely be required to get a Surety bond.
The cost of a Surety bond depends on a number of factors. The two most important are the type of obligation and the qualifications of the Principal.
A typical range for Surety bonds is 0.5% – 3% of the bond amount. Contract Bonds are typically a one time cost for each project while commercial bonds generally renew each year and the premium is also due each year that the bond is in place.
Generally the answer is yes. Most surety bond companies take into account the owner(s) personal assets when deciding to write a Surety bond. For companies, owners with 15% or more ownership in the company stock will generally be asked to personally indemnify.
There are exceptions. Companies with very strong net worth positions may be able to get surety bonds with only the company’s indemnity. However, not every surety bond company will consider this and it is usually limited to companies with over $1 million in analyzed net worth.
If an individual is required to personally indemnify the Surety bond company, the spouse will be required to as well. This prevents couples from transferring or sheltering assets. A bond company may be willing to exclude some assets if they are of sentimental value only.
This depends on the type of bond. Most court bonds including probate bonds cannot be cancelled until they are released by the court. Contract Bonds are also not cancellable They are in place until the underlying obligation has been fulfilled. Most types of commercial Surety bonds can be cancelled. However there is usually a notice requirement to the Obligee.
Surety bonds that can be cancelled (see above) can usually have the unearned portion of the guarantee refunded. This is not always the case as some obligations are fully earned once the bond is written.
Other surety bonds such as contract bonds cannot be refunded because they are non-cancellable. If a Principal can get the contract bonds returned from the Obligee before the project starts, then they may be refundable.
Generally no. A Surety bond is considered unsecured credit because they do not make a UCC filing against the Principal’s assets unless a claim occurs. That said there is an indemnity agreement in place that requires the Principal to make the Surety bond company whole for any loss.
There are instances when Collateral may be required for Surety bonds. These are generally when either the Principal cannot qualify without it, or when the bond is guaranteeing a difficult obligation.
Dividends are not common in surety. However, some states such as Texas do have dividend plans. In Texas, contractors are eligible for a dividend once their bonded project concludes without any claims. The amount of the dividend varies by bond company.
Electronic Surety Bonds are valid as long as they are issued by a licensed Surety bond company and bond broker. These electronic bonds still need to be sealed with the Surety bond company’s seal. They must also include a power of attorney and be signed by an individual listed on the power of attorney.
T-Listing is an abbreviation for the United States Treasury 570 circular. This is a listing of all the Surety bond companies who are approved by the U.S. Government. A corporate Surety bond company must be on this list for the Government to accept a contract Bond. The listing also provides a value for the largest bond the Government will accept from each company?
Most corporate Surety bond companies have agreements with reinsurance companies or other bond companies for when larger bonds are needed. They simply use the other company’s paper to issue the bond.
Many obligations require that a Surety bond is rated “A-” or better. This is a rating of the bond company’s financial strength. This is an indication of the Surety bond company’s ability to pay their obligations. A very popular rating service is A.M. Best.