It’s no secret that surety is a niche industry—many people are unaware that it even exists until they encounter a bond requirement to carry out some other job or conduct a certain type of business. At the Surety Bond Insider, we are always looking for ways to help people better understand aspects of the surety industry to educate them on the bonding process. The following piece is the first in a series identifying and providing explanation for the most frequently asked questions we receive about surety. So, without further ado, let’s take a look at Part 1: What is a Surety Company?
A surety company provides the financial guarantee for the surety bond.
The surety company guarantees the entity requiring the bond (obligee) that if the person for whom the bond is written (principal) is unable to cover the cost of a claim, the surety will provide the funds to cover the cost. However, unlike traditional insurance companies that assume a loss will occur and factor that into the premium, surety companies operate in such a manner that they assume there will be zero risk of financial loss when issuing a policy.
The first modern surety company in America, Fidelity Insurance Company, received its charter on April 7, 1865— 25 years after the start of London’s first surety company. They are a modern surety company due to the fact that, upon their formation, their intention was to reimburse any employer for loss as a result of fraud or dishonesty by the employed for a small premium based upon the amount of the bond. A modern surety company is often a division of a larger insurance company, although some standalone companies do exist that deal exclusively with surety. Middlemen play a large part in surety, meaning that insurance agents are often the intermediaries to bridge the gap between the public and surety, due to the fact that sureties are largely comprised of underwriters and attorneys who do not directly interact with the general public.
Finally, in order to accept the bond, many obligees require the surety company backing it to be on the Department of Treasury’s Listing of Approved Sureties.
So, how do surety companies avoid losing money when claims are made if they are guaranteeing the availability of funds? And what exactly are these bonds, anyway? Be sure to check out the next installment in our FAQ series Part 2: What is a Surety Bond? where we will cover the ins-and-outs of surety bonds!