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About Surety Bond Companies

Surety bonds are normally underwritten by large to medium-sized insurance companies. National insurance organizations will have specialized departments which will underwrite surety bonds for construction loans. The purpose of the surety bond is to specify financial penalties if a good or service is not delivered according to the terms of a contract. These types of bonds highly specialized and require significant financial capital to underwrite.

The reason why surety bonds are primarily used in the construction industry is due to the large amount involved with the transaction and the possible financial liability for both the builder and the purchaser. These types of bonds are meant to protect both parties in the event that a negotiated property is not delivered on schedule and on budget. Situations such as the builder of becoming insolvent or the buyer losing financial backers can result in one of the parties being left on the hook with no recourse other than a lawsuit.

Federal government that construction projects are one the most frequent users of surety bonds due to their large-scale multi-year timelines and financial obligations. For a contractor to obtain this type of government contract they are legally required to purchase a surety bond to protect the government should the contractor default on their obligation. At that point the insurer backing the bond will be required to pay the amount of the bond to obtain a new contractor and finish the project.

State insurance agencies are responsible for licensing and regulation of surety bond companies and verification that they are in compliance of all applicable laws and statutes. The A.M. Best Company publishes a public report which contains ratings for all surety insurer companies. Just as with any other provider of a good or service it makes sense to double check the rating of a surety bond company before accepting their bond issuance.

Another type of surety bond is issued by the bail bonds industry. Again, this is to protect both parties from possible failure to deliver on a negotiated agreement. In the case of bail bonds it is an agreement between the government and a bail bondsman in reference to an individual which has been bailed out of jail. The bondsman, for percentage of the bond amount, guarantees the government that the individual in question will appear at the required court date. If individual fails to appear than the bond issuing company would pay the bond amount but bail bondsman may not be able find company to underwrite them on future bonds. So most bill bonds companies also have retrieval units which will track down the individual and deliver them back to the municipality.

If surety bond companies did not exist it is unlikely, especially in the construction industry, that any large-scale projects would ever be developed. On projects that cost hundreds of millions of dollars very few if any individuals or corporations would be willing to accept the risk of losing that much money without assurances. Surety bond underwriters absorb the risk, just as any other insurance issuer would such as automobile or life, based on statistics and the likelihood of a project failing. Since it is in their interests to make sure all projects they underwrite succeed they analyze everything from macroeconomic conditions to local government politics which could prevent a project from completing. There are scenarios in which the risk is too high in economically or environmentally unstable countries were an underwriter will not issue a surety bond.

As with any other industry there are sketchy fly-by-night surety bond companies which should be avoided at all costs. It is not unheard of for a sketchy bond company to accept premiums and draw up an agreement then disappear in six months later. It's always best to ensure you are working with a reputable surety bond company with a strong financial history and a well-deserved positive reputation before giving them your money.