Surety Bonds

I have had many clients come to me recently asking about Surety Bonds and what the requirements would be to obtain a bond. My purpose here is to briefly address the what's, why's, and how's of bonding. Because insurance companies are the primary issuers of surety bonds in the United States, there is a common misperception that bonds and insurance policies are one in the same. That is certainly not the case. Most sureties are large insurance companies primarily because they have the capital necessary to make large commitments in the form of surety bonds. Surety is much more like obtaining credit than purchasing insurance. Unlike insurers, surety companies do not expect to suffer any losses, and if they did they would demand reimbursement from the principal.

What is a Surety Bond?
It is a promise to pay one party (the obligee) a certain amount if the second party (the principal) fails to meet an obligation. Usually set forth in a contract. The surety bond protects the obligee should the principal fail to meet their agreed commitments. As a practical matter, a bond is also an instrument of prequalification, representing that the principal has been examined by the surety and found to be qualified to complete their obligations. There are many types of surety bonds, following are a few examples:

Owner/Contractor- Generally used to guarantee proper performance/completion of contracted job. Might include: Bid Bonds, Payment Bonds, Performance Bonds, Maintenance Bonds, Subdivision Bonds, etc.

Government Entity/Company or Individual- Generally used as a guarantee that they will comply with certain underlying statutes, state laws, ordinances, or regulations. Might include: License Bonds, Customs Bonds, Tax Bonds, Broker's Bonds, ERISA Bonds, Motor Vehicle Dealer Bonds, Health Spa Bonds, etc.

Public Official Bonds- Sometimes required for Notaries, Treasurers, Commissioners, Judges, Law Enforcement Officials.

Misc. Bonds- Often support private relationships and unique business needs.

As you can see, there are a wide variety of bonds available that can be used in almost any type of business to assure completion of a project, compliance, fidelity, and other responsibilities between multiple parties.

Why are Bonds required?
Normally to assure one party of anothers ability to pay, perform, or comply with the conditions of a contract.

How do I obtain a Bond?
Depending on the purpose of the bond, it may be as simple as providing test results or other proof of compliance with licensing procedures or it could be a much more detailed and information intensive underwriting process. In the case of contractors, some requirements to obtaining a bond might include: Financial Statements, Bank Letters, Work Schedules, Tax Returns, Questionnaires, References, Business Continuity Plans, Resumes, Credit History, and Personal Indemnification. This can be an intense underwriting process that the surety will use in determining that your company is well-managed, profitable, deals fairly, and fulfills promises and obligations.

I hope this short explanation will provide some insight into Surety Bonds for those who might need to obtain or require bonds for other people. The decision to take on bonded projects might require a change in how your company does business and manages cash flow. The Buckner Company writes more construction bonds than any other agency in our region and we look forward to helping you with all your bonding questions and needs.