Insurance Agent’s Guide to Surety: What is a Surety Bond?
In the world of insurance, most of the time you’re processing policies for clients in a fairly well-established pattern. Make sure your customer’s business license is current, confirm their credit standing, and then find the risk profile for their line of work to make sure that they’re within a reasonable risk profile, etc. However, every so often you’ll get a request for a surety bond, which although similar in principle, is a slightly different thing with its own approach. In this article, we provide insurance agents with everything they need to know about surety bonds.
What is a Surety Bond?
A surety bond is a contract between three parties – the principal (your customer), the surety company, and the obligee (the entity requiring the bond, typically a state or local government). Surety bonds guarantee that the Principal will act in accordance with the terms established by the bond, which are usually a set of statutes or ordinances required for business licensing or performance of contract terms.
Unlike most insurance products, the principal is required to indemnify the surety company against all losses. In other words, the surety company will pay the obligee up to the bond amount for valid claims; however, the principal must reimburse the surety company for all losses, typically including attorney fees and other claims handling expenses.
What is the Purpose of a Surety Bond?
Surety bonds protect the obligee from financial harm in the event that the principal violates the bond provisions. So yes, surety bonds are insurance, but for the obligee rather than the principal. For example, if an auto dealer sold a consumer a vehicle after altering its odometer, then the consumer could file a claim against the dealer’s bond to recover any losses. Since the dealer violated the bond’s provisions, which in this case prohibits any acts of fraud, the consumer can receive compensation through the dealer’s bond.
Think of surety bonds as an extension of credit lent to the principal by the surety company. The surety company guarantees the obligee will be compensated if the principle violates the bond’s provisions, and the principal pledges to repay back to the surety company all claims and claims handling expenses. Without surety bonds, principals would be required to put up the full bond in cash as collateral, which could severely limit their working capital. Surety bonds satisfy the obligee’s liability requirements without forcing the principal to set aside large sums of cash.
How Can an Insurance Agent Obtain a Surety Bond?
BondExchange makes obtaining surety bonds easy. Simply login to your account and use our keyword search to find your bond in our database. Don’t have a login? Enroll now and let us help you satisfy your customers’ needs. Our friendly underwriting staff is available by phone (800) 438-1162, email or chat from 7:30 AM to 7:00 PM EST to assist you.
At BondExchange, our 40 years of experience, leading technology, and access to markets ensures that we have the knowledge and resources to provide your clients with fast and friendly service whether obtaining quotes or issuing bonds.
What are the Different Types of Surety Bonds?
There are many different types of surety bonds, over 11,000 to be exact. However, most bonds will fall into one of the following categories:
- License and Permit
- Financial Guarantee
- Public Official
To learn more about surety bond requirements by industry, check out our page located here.
How are Surety Bonds Underwritten?
When determining whether your customer qualifies for a surety bond, underwriters will examine 1.) The likelihood a valid claim will be made against the bond and 2.) Your customer’s ability to repay the surety company for all claims and claims handling expenses. To make these determinations, underwriters will usually consider the following factors:
- Historical risk of the bond
- Personal credit score
- Years of business experience
- Business financial statements
- History of bond claims
However, not all bonds are underwritten equally, and some don’t require any underwriting at all. For example, notary bonds are issued instantly and at a flat rate to all applicants. Since these bonds are considered relatively low risk, surety companies don’t examine applicants’ credit scores or business financials. However, performance bonds are considered a high-risk surety bond class and are therefore subject to more intensive underwriting requirements. For help determining the underwriting requirements for your customer’s specific bond, contact BondExchange.
What Information is Collected for a Surety Bond Application?
Surety company underwriters will collect and review the following information to determine eligibility and rate for most surety bonds:
- Principal’s legal name and DBA if applicable
- Principal’s address and phone number
- Years in business
- Contact phone number
- Owner(s) name, address, and social security number
For larger bond amounts (usually over $50,000), some surety companies will review the principal’s business financial statements. Underwriters will be looking for businesses with sufficient working capital (current assets – current liabilities) and a history of profitability.
How Much Does a Surety Bond Cost?
Most surety bonds can cost anywhere between 0.75% to 5% of the bond amount per year. Surety companies determine the rate based on a number of factors including your customer’s credit score and experience. The chart below offers a quick reference for the approximate bond cost on a $20,000 surety bond.
$20,000 Surety Bond Cost
|Credit Score||Bond Cost (1 year)|
|650 – 699||$200|
|625 – 649||$250|
|600 – 624||$300|
|550 – 599||$800|
|500 – 549||$1,000|
*The credit score ranges do not include other factors that may result in a change to the annual premium offered to your customers, including but not limited to, years of experience and underlying credit factors contained within the business owner’s credit report.
How are Surety Bonds Filed?
The surety company will provide your customer with a completed surety bond to be filed with the obligee. Most obligees require the original bond with a raised surety company seal to be filed by mail, however, an increasing number of obligees are allowing principals to file their bonds electronically.
Surety companies should include the following information on most bond forms:
- Legal name and address of entity/individual(s) buying the bond
- Surety company’s name, address and phone number
- Bond amount
- Signatures of the surety representative
- Date the bond is effective and issued
- Corporate seal of the surety company
- Power of Attorney
What Can Principals Do to Avoid Claims Against Their Surety Bond?
To avoid claims made against their bonds, principals must adhere to all provisions contained within the bond form. Claims made against a surety bond are completely avoidable and typically only occur when the principal acts unethically. If your customer adheres to their bond’s provisions, they won’t have to worry about any valid claims being filed.
How can Insurance Agents Prospect for Surety Bond Customers?
Surety bonds are a great product line for insurance agents. They create sticky relationships with clients who most often need other types of insurance in conjunction with their bond. At BondExchange, we feature all agents enrolled with us on our agent finder tool, which serves to pair agents with principals in their area in need of surety bonds. Additionally, our BX Pro feature gives agents the ability to insert a customizable widget on their website, allowing their customers to quote bonds instantly.