Surety Bond is a bond issued by an entity on behalf of a second party, guaranteeing that the second party will fulfill an obligation or series of obligations to a third party. In the event that the obligations are not met, the third party will recover its losses via the bond. Surety companies play an important role in commerce by providing assurance, in the form of a “bond,” that an individual or company will perform contractual or legal obligations in an appropriate manner.
The first surety company was started in the United States in the 1880s and the industry is now worth nearly $4 billion in annual business. Surety companies write bonds in a variety of situations that can be roughly divided into three broad categories: commercial, construction and court.
Types of Surety Bonds
1.) Commercial Bonds. A surety bond is often required as a prerequisite for engaging in commercial activity, typically in situations in which a license is needed. Such situations can include acting as a notary, insurance broker, mortgage broker, or freight broker.
2.) Construction Bonds. Government agencies almost always require surety bonds on construction projects as a way of protecting taxpayer dollars. The surety’s bond acts as an assurance that the project will be completed as promised.
3.) Court Bonds. Probate court proceedings frequently require the posting of a bond to protect against acts of dishonesty in a fiduciary relationship, such as with an executor of an estate or guardianship.
• If you need to obtain a surety bond, you must demonstrate to the surety company that your financial affairs are in order and your character and reputation in the community is good.
Getting a Surety Bond
1.) Find an agent experienced in writing surety bonds for your industry. Most agents work in a surety bond company or are insurance agents with a sideline in issuing surety bonds.
2.) Meet with the agent to discuss your business and your business plans. This way, he or she can get a better idea of what kind of surety coverage you need and what companies can best suit your unique situation.
3.) Assist the agent in passing on information about your company to the surety bond underwriter. The underwriter will examine the documentation submitted, like financial statements, your history of paying bills on time and your banking relationship, to make a judgment as to whether or not you can complete the project they will be bonding.
4.) Pre-qualify yourself for the surety bond by showing that your company is a well-run organization. Show the surety bond company an organizational chart with resumes of key personnel, your business plan, audited accounting statements and a history of completed projects, among other documentation.
5.) Sign the indemnity agreement, if required by the surety company. This agreement guarantees reimbursement to the surety company for any losses they incur because of the contractor’s performance. Depending on the situation, the indemnity may be corporate or personal.
6.) Maintain your relationship with your surety bond company. This will streamline the process in the future and allow you to quickly bid for projects that require bonding. In addition, the surety company will be able to easily refer you to other professionals that you may need to run your business smoothly, like accountants, bankers or lawyers.