No, we're not talking about James Bond's younger brother, but a very specialized area of insurance. Surety is a promise to pay, which sounds a lot like "insurance." But surety bonds are a bit more complex than "regular" policies.
And that's as far as this blogger's willing to go with the idea. Recently, we were offered some insights into this rather arcane area of insurance by Kevin Kaiser, a principal for Surety Bonds Dot Com, a nationwide leader in that sector of our business. Take it away, Kevin:
Although surety bonds are different than insurance, the two often get confused. It doesn’t help that “surety bonds” and “surety insurance” mean the same thing, which tends to confuse consumers. Making use of surety bonds guarantees project owners and contractors fulfill any and all contractual agreements.
■ The primary difference
Even though money could change hands, surety bonds are not insurance. Surety bonds involve three parties, whereas most insurance policies rely on policy holders’ premiums that cover any losses. Instead of placing the risk with one party, insurance policies usually distribute the risk over its policy holders.
■ How surety bonds work
Let’s consider an example. A city’s parks and recreation department wants to build an outdoor pool for the summer months. The city hires a contractor who gets a payment bond.
■ Surety bonds’ payments
Now, if the contractor fails to hold up its end of the contract, workers and subcontractors still get paid. The surety guarantees that the contractor pays any subcontractor who files a claim against the bond. Most surety bonds include a clause that requires the contractor (principal) to make such repayments when the surety pays out a claim. Thus, the city and surety do not assume any financial risk in the unlikelihood of the contractor’s default.
It seldom happens, but the surety has to cover costs if the principal cannot. Thanks to stringent underwriting procedures, surety companies eliminate unpredictable companies.
■ The cost of surety bonds
Surety bonds do not anticipate financial loss like insurance does. Consequently bond premiums typically finance underwriting and other prequalification services. The cost of the premium depends on the surety company, the type of bond applied for and the applicant’s financial history. One to four percent is a sound estimate of premium costs, but if a surety company classifies an applicant as high-risk, the premium falls between five and 20 percent of the bond amount.
■ Getting a surety bond
Applicants with mediocre credit or a fledgling business can still obtain a surety bond. Of course, lower credit scores make applicants more likely to be labeled high-risk [ed: we understand that this is the case with, for example, home and auto insurance, as well]. Some startup companies may be legally required to get a bond to pay for an operation license. To determine what kind of bond an applicant receives surety companies consider credit, references, reputation, financial reserves and the ability to operate among other things.
The time it takes for a surety to approve a bond depends on the type of bond, restrictions of the surety and the underwriting process. After paying the premium, applicants will probably get the bond in one or two days. Processing a surety bond may take up to four days, though some sureties approve bonds immediately.
Thanks, Kevin! I have to admit, I’d never really considered the surety side of the biz before; this helps make it a bit more accessible.
And that's as far as this blogger's willing to go with the idea. Recently, we were offered some insights into this rather arcane area of insurance by Kevin Kaiser, a principal for Surety Bonds Dot Com, a nationwide leader in that sector of our business. Take it away, Kevin:
Although surety bonds are different than insurance, the two often get confused. It doesn’t help that “surety bonds” and “surety insurance” mean the same thing, which tends to confuse consumers. Making use of surety bonds guarantees project owners and contractors fulfill any and all contractual agreements.
■ The primary difference
Even though money could change hands, surety bonds are not insurance. Surety bonds involve three parties, whereas most insurance policies rely on policy holders’ premiums that cover any losses. Instead of placing the risk with one party, insurance policies usually distribute the risk over its policy holders.
■ How surety bonds work
Let’s consider an example. A city’s parks and recreation department wants to build an outdoor pool for the summer months. The city hires a contractor who gets a payment bond.
■ Surety bonds’ payments
Now, if the contractor fails to hold up its end of the contract, workers and subcontractors still get paid. The surety guarantees that the contractor pays any subcontractor who files a claim against the bond. Most surety bonds include a clause that requires the contractor (principal) to make such repayments when the surety pays out a claim. Thus, the city and surety do not assume any financial risk in the unlikelihood of the contractor’s default.
It seldom happens, but the surety has to cover costs if the principal cannot. Thanks to stringent underwriting procedures, surety companies eliminate unpredictable companies.
■ The cost of surety bonds
Surety bonds do not anticipate financial loss like insurance does. Consequently bond premiums typically finance underwriting and other prequalification services. The cost of the premium depends on the surety company, the type of bond applied for and the applicant’s financial history. One to four percent is a sound estimate of premium costs, but if a surety company classifies an applicant as high-risk, the premium falls between five and 20 percent of the bond amount.
■ Getting a surety bond
Applicants with mediocre credit or a fledgling business can still obtain a surety bond. Of course, lower credit scores make applicants more likely to be labeled high-risk [ed: we understand that this is the case with, for example, home and auto insurance, as well]. Some startup companies may be legally required to get a bond to pay for an operation license. To determine what kind of bond an applicant receives surety companies consider credit, references, reputation, financial reserves and the ability to operate among other things.
The time it takes for a surety to approve a bond depends on the type of bond, restrictions of the surety and the underwriting process. After paying the premium, applicants will probably get the bond in one or two days. Processing a surety bond may take up to four days, though some sureties approve bonds immediately.
Thanks, Kevin! I have to admit, I’d never really considered the surety side of the biz before; this helps make it a bit more accessible.
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