What Is a Company That Writes Surety Bonds
Companies that underwrite surety bonds are essentially guaranteeing the performance of one party to another party. The other two parties may be a contractor and a project owner, or a license holder and a government agency. Surety companies tend to be part of larger insurance companies, but there are companies that specialize in bonding only.
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History
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The surety industry is nearly a $4 billion business in terms of annual sales and can trace it roots to the 1880s. Surety bonds are used to facilitate commerce and can be helpful in assisting economic development, protecting consumers and guarantying performance of contracts such as large construction projects. Surety bonds are almost always required by government agencies to manage risk on a public works construction contract.
Types of Bonds
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There are many types of surety bonds and they can be divided into three broad categories: contract bonds, court bonds and commercial bonds. Each category can be further subdivided into many other categories. Most surety companies will specialize in one category of bonds because the underwriting criteria for each type of bond can vary greatly.
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Contract Bonds
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Construction projects, especially large ones involving government funds, nearly always use contract bonds to ensure the project will be completed on time and on budget. There are bonds specifically tailored to each phase of the construction project from bidding, through payment of subcontractors and final completion. It is not uncommon for the same company to underwrite each type of bond throughout the project.
Court Bonds
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Surety bonds are used in court proceedings, in particular probate court cases, to ensure acts of dishonesty do not occur. A surety bond is typically required to protect the estate assets from mismanagement or even fraud involving the executor. Surety bonds may also be required in guardianship case and trust administration.
Commercial Bonds
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A government issued license is frequently required as a condition of doing business, such as a contractor's license, freight brokers' license or insurance brokers' license. These license bonds are categorized as commercial bonds. A surety company underwrites these bonds that are typically intended as a form of consumer protection. A licensee who conducts his business according to best industry standards will easily qualify for renewal of his surety bond each year he is in business.
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References
- Photo Credit Construction image by Victor M. from Fotolia.com
