Most surety bonds in United States are engrossed by subsidiaries or divisions of insurance companies regularly engaged in the business of acting as a surety. Surety insurance companies typically are authorized and qualified to do business by the state insurance commissioner where they are dwelling and in the jurisdiction where the bond is issued. There are various very good specialty surety companies in the market. These specialty surety companies meet the financial strength postulates and have the added benefit of surety bonds being their core business.
The state departments of insurance policy regulate surety companies, which must meet minimal capital requirements, file periodical financial reports in those jurisdictions where they are licensed to do business, and are subject to market conduct inquiries, among other regulatory postulates and actions.
Both surety bonds and traditional insurance policies, such as property insurance, are risk transfer mechanisms regulated by state insurance departments. Nevertheless, conventional insurance is a two-party agreement designed to compensate the insured against unforeseen adverse events. The policy’s premium is determined based on aggregate premiums earned versus expected losses. Surety insurance companies operate on a different business model. Surety bonds are three-party concord indemnity designed to prevent a loss. The surety does not assume the essential obligation but is secondarily liable, if the principal defaults on its secured obligation.
The surety sees its underwriting as a form of credit, similar to a lending arrangement. For contractual surety, for instance, the surety will determine in-depth the contractor’s credit history and financial strength, experience, equipment, work in progress, management capacity, and character of the company getting bounded by the bond. After the surety assesses these factors, it makes a finding as to the appropriateness and the amount, if any, like that of surety credit.
Thus, if the surety extends its credit to a contractor, the surety does not expect to suffer losses because the surety expects the bonded contractor to do its obligations successfully, and the surety has a signed indemnity agreement from the contractor to shield it from any losses. The general agreement of indemnity is signed between a surety company and a contractor. This GIA is a powerful legal document that obligates the named indemnity holders to protect the surety from any loss or expense the surety experiences as a result of having issued bonds on behalf of the bonded principal. A surety company almost always asks that the principal, the individuals who own and control the company, their spouses, and often affiliated establishments to sign the GIA before it will issue bonds on behalf of the contractor.
