Suretyship is associated with insurance as most sureties are property/casualty insurance companies however a surety’s method of operation involves underwriting practices which more closely resemble banking than insurance. Insurance is a contract between two parties, the insured and the insurer. Suretyship is an obligation between three parties: the Principal, Surety and Obligee. The surety agrees to be jointly bound with the principal for the obligation of the principal to the obligee. Simply, a surety bond is an instrument under which one party guarantees to another that a third party will perform its obligation.
Surety bonds once written are broad documents. The bond guarantees that promises made will be kept. If the principal defaults, the surety must fulfill the guarantee. Unlike insurance where losses are anticipated, in theory there should be no losses under surety bonds. If there is a loss, the bond principal is responsible for indemnifying the surety.
The majority of surety bonds are required by law or regulations of any of the political divisions of the government system, The other bonds often encountered arise out of the need to secure or guarantee contractual obligations from one private entity to another. There are a number of broad classifications of surety bonds with the major groups being:
Contract bonds make up the largest group of surety bond writings. They guarantee that the Principal will carry out the terms and conditions of a contract, generally of a construction nature. Contract bonds can be required on public works or private projects. The role of the Surety in this process is provide assurance that the project will be completed according to the specifications, time and cost provisions contained in the underlying contract. Bid, Performance and Payment, Subdivision, Completion, Design & Build, Supply, and Maintenance bonds are the primary types of contract bonds encountered.
License and permit bonds generally are required to protect the public welfare; Government organizations of many types and levels require these bonds either by law or regulation. These license bonds generally guarantee that the Principal will comply with the rules governing their activities. They can protect the public from fraud, incompetence, bodily or property damage or credit losses.
Judicial bonds provide a guarantee on the part of a Principal that is involved in a court action. All court bonds are non-cancelable in nature. They can guarantee costs, damages, actions or faithful performance of an obligation overseen or directed by the court.
Miscellaneous bonds generally are described as any private or public bond not readily classified under the other bond types. These bonds are vast in their scope and are often broad coverages whose risk factors and obligations are only defined and ascertained within the underlying obligation being bonded. Quite often, the real obligation being bonded is the compliance to the underlying agreement and in the event of failure to comply, the payment of money to compensate for recouping of losses, or as a penalty for default. These financial guarantee obligations often contain some of the most onerous hazardous and long-term risk factors within the surety industry.
These bonds are required in many of the public offices held and state county and local levels. If the position is one in which handling of public funds is involved a bond of this type is normally required. These bonds generally guarantee the faithful performance of the duties of the position. These bonds for tax collectors, supervisors and treasurers can be very large in size and may according to the governing regulation require various standards and aspects of performance for similar positions in different jurisdictions. A key aspect to undertaking these risks is the understanding of the financial controls in place for these positions.