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What is a Surety Bond?

"He that is surety for a stranger shall smart for it."
Proverbs 11:15 KJVM

 
By J. Mark Strange, Surety Advisors, LLC, Bonding Agents

• What is a Surety Bond?
  Suretyship is one of the oldest forms of financial service. In ancient times a person might leave a family member as "surety" to another until an obligation or debt was discharged. The modern surety bond is a three party contract where the bonding company guarantees the performance of a service by an individual or organization called the bond principal to the benefit of a third party or entity called the bond obligee.

• What is the Surety's Job?
  To protect public and private interests against financial loss resulting from a company or individual's bankruptcy or failure to perform a contracted service.

• Is a Bond the Same as Insurance
  No. Insurance is a risk sharing device that expects losses based upon calculated probabilities. Though losses occur, bonds are structured and written with the expectation that few losses will occur and those that do occur are recoverable. A bond closely resembles a bank letter of credit. The surety is lending its credit to a person or organization to back their service or performance of an obligation.

• Then Why do Insurance Companies Write Most Bonds?
  The U.S. Corporate Surety Industry was developed in the latter half of the 19th century. Due to the hazardous nature of the business only well capitalized companies could afford to engage in the business. Insurance companies because of their unique knowledge of risk and their financial strength became the predominant providers of this service. There are only a few independent corporate sureties left out of the 200+ companies providing bonds.

• Where do I get a Bond?
  Most bonds can be obtained from independent agents that offer or specialize in this service. A good resource is the National Association of Surety Bond Producers (NASBP), the professional agent organization representing the agents responsible for writing most of the surety bonds in the U.S. and Canada.