The Basics of Surety Bonding

What is a bond and why do I need it?

A bond is a promise or a guarantee, but what the bond guarantees varies depending on the language of the bond. It is a form of credit, not insurance. You usually need it because a third party is requiring it of you.

How do I get a bond?

The process varies by the type of bond required. It's important that you know what type of bond is needed and obtan any necessary bond forms. If you call an agent and tell them you need a surety bond the first question they wll ask you is what type of bond you need. An application then needs to be completed and underwritten and depending on the type and limit of the bond, approval can be as fast as 24 hours or as long as 6 weeks. We have authority within our office to issue certain types of bonds immediately. With contract bonds, once approved formal General Indemnity Agreements need to be signed by all owners and spouses of the company before any bonds can be issued.

How does a bond work?

The surety makes a guarantee on behalf of the primcipal. A claim can arise when the principal does not abide by the terms or does not do what is promised in the bond. In the event of a claim, the surety will investigate to ensure it is valid and if the claim is found to be valid the surety can take various actions to rectify the situation. They will then look to the principal for payment of the claim and any associated fees.

What do bonds cost?

Premiums vary greatly depending on the applicant, limit and bond type. Just like any other form of credit, everyone does not receive the same rate. Standard market rates are typically anywhere from 1/2-3%, while higher risk or sub-standard markets can range anywhere from 5-20%.

What is a bond form and where do I get it?

A bond form is the paper that the bond is written on. It states exactly what the bond is guaranteeing. Depending on the type of bond you may need to obtain the bond form from the obligee. Often wth municipal work it will be included in your contract or bid packet with the obligee. Some licensing agnecies include the bond form with license packets.

Why bother with a bond if I have to pay for the claims?

A bond is not an insurance policy; it is a form of credit. The indemnity agreement is where the principal (you) agree to be responsible to pay any claims. Surety companies will not issue bonds without a signed indemnity agreement. Sometimes an alternative to a bond is to post cash or a irrevocable letter of credit from a bank. Posting a bond shows the Obligee that you are creditworthy; many times just showing an obligee that you can obtain the bond is enough to convince them to do business with you.

Why does everyone have to sign a indemnity agreement?

The surety is guaranteeing something on your behalf that is directly tied to your performance.  Because of this, they have all owners and spouses personally guarantee the bond. If the spouse is not willing to sign, it shows a lack of confidence in your ability to fulfill the duties the bond is requiring. Also, in some states such as Nevada, married couples have joint assets which may be attached in the event of a claim.

McCormick Insurance Bond Forms

Surety Bond Types