I frequently get calls from people wanting a surety bond but they aren't quite sure what it is or how it works. I have copied most of the following explanation from the Independent Agents & Brokers Association as it explains a surety bond very well.
A surety bond is a three-party agreement between a surety company, an oblige and a principal. The third party (surety company) guarantees to the second party (oblige) the successful performance of the first party (principal). The surety company guarantees that the obligations of the principal to the oblige will be performed in accordance with a contract, statute or regulation. Bonds are used to protect public and private funds from financial loss.
How is a surety bond different than an insurance policy?
A surety bond and an insurance policy are not the same. The cost of assumed losses are calculated into the price of an insurance policy premium (this means that you as the Insured on a policy are not responsible for paying anything other than your deductible). A bond, on the other hand, is an extension of credit with the expectation that the legal obligation will be fulfilled, and subsequently, there will be no loss (meaning that the bond company expects that if there is a claim on your bond, you will be reimbursing the bond company). Losses are not included in the cost of bond premiums, only underwriting expenses are factored into the rates.
Why do surety bonds need to be underwritten?
A surety company must determine the risk of a loss occurring if the principal is unable to satisfy the obligation under the bond. Since a bond is an extension of credit, the surety company must review the principal's financial information and business experience to determine if certain requirements are met to support the bonded obligation. Just as a bank evaluates loan applications, surety company underwriters evaluate risks in a similar way by considering business and personal financial statements, credit reports, credit references and other factors.
What are the benefits of surety bonds?
Surety bonds are a mechanism for transferring risk. The surety company assumes the risk of the principal doing business from the oblige. Federal, state and local governments generally require surety bonds to give certainty that business owners and individuals will adhere with various laws safeguarding public funds. For example, license bonds protect the public from business impropriety. Contract bonds protect taxpayers by pledging that projects are finished appropriately, on time and without liens. Court, public official, government and miscellaneous bonds protect and secure public funds and private interests.
In closing, virtually all bonds are based on your credit score or the credit of the business owners and are priced accordingly. First Choice Insurance Services has access to several bonding companies to assist you regardless of your credit.