What are Surety Bonds?
Who are Surety Bond Producers?
What are Surety Companies?
What Are Surety Companies?
Most surety bonds in the United States are written by subsidiaries or divisions of insurance companies regularly engaged in the business of acting as a surety. Surety companies typically are authorized and qualified to do business by the state insurance commissioner where they are domiciled and in the jurisdiction where the bond is issued. The state departments of insurance regulate surety companies, which must meet minimum capital requirements, file periodic financial reports in those jurisdictions where they are authorized to do business, and are subject to market conduct investigations, among other regulatory requirements and actions.
Both surety bonds and traditional insurance policies, such as property insurance, are risk transfer mechanisms regulated by state insurance departments. However, traditional insurance is a two-party agreement designed to compensate the insured against unforeseen adverse events. The policy premium is actuarially determined based on aggregate premiums earned versus expected losses. Surety companies operate on a different business model. Surety bonds are three-party agreements designed to prevent a loss. The surety does not “assume” the primary obligation but is secondarily liable, if the principal defaults on its bonded obligation.
The surety views its underwriting as a form of credit, much like a lending arrangement. For contract surety, for instance, the surety will examine in-depth the contractor’s credit history and financial strength, experience, equipment, work in progress, management capacity, and character. After the surety assesses such factors, it makes a determination as to the appropriateness and the amount, if any, of surety credit.
Thus, if the surety extends surety credit to a contractor, the surety does not expect to suffer losses because the surety expects the bonded contractor to perform its obligations successfully AND the surety has a signed indemnity agreement from the contractor to protect it from any losses. The general agreement of indemnity, or GIA, is a contact between a surety company and a contractor. The GIA is a powerful legal document that obligates the named indemnitors to protect the surety from any loss or expense the surety suffers as a result of having issued bonds on behalf of the bonded principal. A surety company almost always requires that the principal, the individuals who own and/or control the company, their spouses, and often affiliated companies to sign the GIA before it will issue bonds on behalf of the contractor.