What is a Surety Bond?

Surety is not insurance. Despite being transacted within the structure of the property and liability industry, there are some very important differences between surety and insurance.
A contract of suretyship, or a surety bond, is one in which the fulfilling of an obligation by one party to another is guaranteed by a third party.
The three parties to a contract of suretyship are:

  • Principal – the one who undertakes to perform, to fulfill a contract or to meet an obligation.
  • Obligee – the one for whom the obligation is to be performed and the party to whom the guarantee is provided.
  • Surety – the one who guarantees the performance of the principal to the obligee.

Contract Bonds:
Contract bonds guarantee the fulfillment of a contractual obligation, particularly a contract or agreement for construction work or supplying of goods or services.
There are four principal subclassifications of contract bonds:

  • Bid Bond – this type of bond is required to accompany a bid for a contract that may require that the successful bidder furnish further bonding requirements if awarded the job. If the obligee awards the contract and the bidder refuses to perform the work or provide final bonds, the bid bond guarantees to the obligee payment for the difference between the amount of the bid and the bid of another that is accepted.
  • Performance Bond – this type of bond guarantees indemnification to the oblige for any losses resulting from the principal’s failure to complete the contract work in accordance with the job specifications.
  • Payment Bond – a payment bond guarantees that all labor and materials for the project will be paid by the contractor upon completion of the work. A payment bond is normally required whenever a performance bond is required and they frequently are combined as a single instrument.
  • Maintenance Bond – a maintenance bond guarantees, for a specified period of time after completion of the job, that the contractor will correct any faulty work or replace defective materials.

Two other special types of contract bonds are:
Subdivision Bonds – this type of “completion bond” may be required by a permitting authority to guarantee that promised streets, sidewalks, sewers, streetlights and other required improvements will be installed.
Supply Bonds – these bonds are often required by one who is purchasing goods from another and guarantee delivery at an agreed upon price and in accordance with the terms of the supply contract.
Because of the specialized nature of contract surety the underwriting requirements are more extensive, and include CPA financial statements, personal statements, a contractor’s questionnaire form, and details regarding the proposed bid.
Commercial Surety:
Commercial Surety encompasses a wide range of different obligations.
These include:

  • Fiduciary and Court Bonds
  • License and Permit Bonds
  • Miscellaneous Bonds

Each class of commercial surety bond has its own specialized application and the underwriting requirements vary depending upon the class of bond. Some commercial surety obligations require a strong credit report, others may require a financial statement in support of the bond.
Please advise us as to the nature of your surety needs and we will supply you with the underwriting requirements necessary to issue your bond.