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The following article was published in our article directory on March 11, 2014.
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What exactly are surety bonds?

Article Category: Finances

Author Name: Gemma-Leigh Garner

The word surety is from the Latin securitas, or the state of being secure. It can also mean sureness or assurance. It is something that makes sure or gives assurance against loss, damage or default. Default is failure to do something.

A bond is a binding agreement or a covenant. It is an insurance contract by which a bonding agency assures the performance of the provisions of a contract by a contractor or subcontractor.

Surety bonds are three-party agreements whereby the surety assures the project owner (also called the "obligee") that the contractor (the principal) will perform a contract in accordance with the contract document. In surety bonds, when the contractor requires a sub-contractor and this sub-contractor is required to be bonded, the contractor becomes the "obligee" and the sub-contractor becomes the principal.

What are the primary types of surety bonds?

Bid Bonds - provide financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid.

Performance Bonds - are surety bonds that protect the owner from financial loss, should the contractor fail to perform the contract in accordance with its terms and conditions.

Payment Bonds - are surety bonds that assure that the contractor will pay certain workers, sub-contractors and materials suppliers.

How can you get surety bonds?

It all starts when you contact a professional agent or broker, also known as surety bonds producer.

The producer guides you through the process of getting bonds, helps establish a business relationship with surety companies and assists in managing your surety capacity. The producer has his sound business advice and technical expertise about surety bonds to offer clients.

The producer will tailor your submission to the specific requirements of the surety company. He will then submit the account to a surety company that is best matched to your profile and needs.

With the necessary information, the producer submits to the surety company underwriter, who takes an in-depth look at your entire business operation. This underwriter must be convinced that you are capable of completing the project.

If necessary, you will be asked to meet with the underwriter so he will get more information on the single job size and aggregate work load for all projects, bonded or not, in your current and projected work program. The underwriter does not only focus on your finances but also in other elements of your business organization, track record and approach to a job.

The surety company pre-qualifies the contractor based on financial strength and construction expertise. A premium is primarily a fee for pre-qualification process

Premiums range from 1/2 of 1 percent to 3 percent of contract price, depending on the size, type and duration of the project and the contractor. Typically, there is no direct charge for a bid bond. In many cases, performance bonds include payment bonds and maintenance bonds.

Companies involved in sureties are subsidiaries or divisions of insurance companies. They are risk transfer mechanisms. However, insurance companies are designed to compensate the insured against unforeseen adverse events. Premiums are actuarialy (calculated statistically) determined based on aggregate premiums earned against expected losses.

Actuary uses mathematics, statistics and financial theory in determining risk and uncertainty. An insurance actuary is a statistician who calculates insurance premiums, risks, dividends, and annuity rates. He mathematically evaluates the probability of events and quantifies the contingent outcomes in order to minimize the impacts of financial losses associated with uncertain events.

What with all the processes involved, surety bonds are essentially instruments used to prevent loss.

Keywords: surety bonds

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