For those who are already familiar with surety industry terminology, this may seem like a simple question. To help everyone get on the same page, let’s break it down using the proper terms.
The Principal - The party who will perform the contractual obligation and is required to post the bond.
The Surety – Typically an insurance company that assures or guarantees that the principal will perform the obligation or pay a sum of money to the obligee for the principal’s default.
The Obligee – The party who requires the principal to post a surety bond and receives the benefit of the bond in the event of default by the principal.
What are surety bonds?
A surety bond is a three-party agreement in which the Surety guarantees to the Obligee the performance, payment, compliance, or other action that the Principal is required to complete by law or by an underlying agreement. If the principal defaults on the obligation, the obligee can contact the surety and file a claim for the amount of loss, up to the penal amount, or face amount, of the bond.
Why are surety bonds required?
There are 3 distinct categories of surety bonds: Commercial Surety Bonds, Contract Surety Bonds, and Court Surety Bonds. Each category covers specific risks associated with the bond. Most people are searching for a Commercial Surety Bond, also known as license and permit bonds. This is a requirement of the principal when they wish to be licensed or permitted to perform a certain business or task.
Surety bonds are NOT insurance!
Many websites use the term “Surety Insurance” to sell you a bond. This should be a red flag for the reader.
Surety is based upon a known and definable risk, and the premium was historically established as an expense to cover the cost associated with underwriting the risk. Surety is a credit relationship, wherein the Surety Company extends its credit on behalf of the principal based upon the creditworthiness and financial strength of the Principal. Surety credit is also based on indemnity, wherein the principal guarantees to the surety that they will hold them harmless and reimburse any monies expended on claims paid out by the surety.
Insurance is based upon the theory of pooled risk. The insurance company will group similar risk scenarios and calculate a premium based upon historical loss factors and a calculation of estimated losses in order to set their profit margin. There is no required indemnity in insurance.
Don’t be fooled into thinking that a surety bond is the same as insurance!
What does a surety bond cost?
Surety bond premiums vary greatly and are based on the type of risk, the amount of the bond, and in most cases personal information such as a credit report, financial statements, or a set of underwriting questions. Each bond has different requirements, and each principal has different situations. A1SuretyBonds.com takes the time to understand the underlying situation in order to provide the best quote available for your bonding needs. Whether you need 1 bond or 50 bonds, we treat every client with the same respect because we know your time is just as valuable as your money.
The simplest way to determine your exact surety bond premium is to complete our online application or contact our office to speak with a surety underwriter at 800-737-4880. Our surety bond professionals are waiting to assist you in securing a firm premium quote and approval for your bond.
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