About Surety Bond Companies

By John Hewitt

  • Overview

    About Surety Bond Companies
    Surety bond companies underwrite surety bonds. Most surety bonds are underwritten by specialized departments of larger insurance companies, but some are small businesses that focus on providing services to other relatively small enterprises. Surety bonds are components of contracts that stipulate financial penalties if services and goods are not rendered according to the terms of the agreement.
  • Significance

    Surety bonds are most common in the construction industry. Contractors, at the beginning of a project, will include a surety bond at the beginning of the contract that will pay out penalties to the other side of the deal if either something goes wrong with the project, the construction company becomes insolvent or services are not rendered according to the requirements of the contract. The bond encourages the company to stay with the project until resolution.
  • Expert Insight

    One of the most frequent uses of surety bonds, and sources of business for surety bond companies and departments, are Federal Government construction projects. Surety bonds are legally required for all contractors taking on such work, such as school construction or other similar projects. If the contractor falls through, the surety company will most often be required to pay for the completion of the project with another contractor.

  • Function

    Surety companies must be licensed by the appropriate state insurance regulatory body before legally conducting business. The A.M. Best Company publishes annual ratings of each of these companies in its public report. Surety bond companies do fail on occasion, and a poorly-rated company should be avoided, even if it charges lower premiums than its competitors.
  • Identification

    Bail bonds are another type of surety that are almost always written by companies that specialize in those types of agreements. These bonds are agreements between the government and a bail bondsman that are undertaken when a criminal pays for bail to get out of jail. The bondsman agrees to make sure that the person out on bail will make their court appearance in a timely fashion. If the person fails to make their court appearance, the bondsman contracts a fugitive recovery agent to find the person and bring them into custody.
  • Benefits

    Surety bond companies help to reduce the overall risk in the economy, especially when large projects are involved. They tend to perform better during times of high construction, like when real estate prices are booming or vast increases in government spending are occurring. The best surety companies are financially secure enough to provide credit when the bond is in trouble of going through, and engineer the agreements carefully to ensure that the penalty for breaking the contract is high enough without introducing too much risk to the contractor.
  • Warning

    Surety bond fraud is an extremely common crime. Many "fly-by-night" surety bond companies simply write the agreement, take the premium and spend the money elsewhere. If the contractor enters default, the company closes up shop and disappears, and the bond never pays out. This is one reason why it is important to pay attention to company ratings before contracting with a surety bond company. Major insurance companies, even though they may be more expensive, will almost certainly follow through on its agreements.
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