Surety bonds are issued by companies licensed by either the federal government or a provincial regulatory authority. These companies must demonstrate financial solvency and the capacity to lay aside sufficient strength for potential claims obligations.
What is a surety bond?
A surety bond is a three-party contract between the principal, the obligee, and the surety. In our example, the principal is the importer, the government agency (the CBSA) is the obligee, and the surety company provides the bond. Visit website for more information on how these bonds work and the role each party plays in the process.
Obligee: The entity requiring the bond, typically a government agency for that industry.
Principal: The person or business obligated by the obligee to obtain a bond. Surety: The insurance company that writes and funds the surety bond.
How does a surety bond work?
A surety bond obligates the surety to pay the obligee a certain amount of money if a principal or importer defaults on the contractual obligation.
What is an indemnity agreement for surety?
A surety indemnity agreement is a signed document through which the surety indemnifies the principal for losses and damages which arise through the performance of a contract. Indemnification means compensating the surety; putting the surety back where it was before.
What is the purpose of an indemnity agreement?
When used in relation to indemnity in the legal context, it can also be described as a release from liability for damages. There exists a contractual relation between the two parties thereby entitling one party to be indemnified by another party against such losses or damages.
What is surety underwriting?
Surety underwriting is the analysis carried out by an expert for the purpose of assessing the bond eligibility and determining the bond amount that the applicant is going to pay. Surety underwriters analyze the bond application and examine the applicant’s financial background to assess the level of risk the surety company is taking in writing out a bond.
Why Surety companies Underwrite Bonds?
The reason why the surety underwriting process takes place is that, according to the surety company, the bond poses a risk. This risk is the potential loss of money arising from negligent or harmful acts committed by the principal.
The Surety Underwriting Principles
Surety underwriters consider three basic factors:
1. Character – looks at honesty, integrity, and adherence to obligations basically, any fraudulent information will make a person look suspicious.
2. Capacity – looks at experience, knowledge, credit history, and the ability to fulfill obligations.
3. Capital – the higher the amounts of the bonds and long-term bonds are the riskier.
The underwriters may also review risk assessments if there are bonding statutes and licensing laws.
How Applicant Information Affects Bond Quotes
• Most qualified applicants pay about 1%-3% of the bond amount.
• Above-average fees or denial may result from:
• Bankruptcy, lawsuits, and/or liens.
• Failure to pay, or being high risk for bond type.
• Higher bond amounts or poor credit.
It varies from one application to another, and underwriting will be different in every instance.
Surety Bonds are different from Insurance
A surety bond refers to an agreement between the:
• Principal (applicant);
• Obligee (entity which requires the bond);
• Surety Company (guarantor).
In contrast to insurance, a surety bond will guarantee proper performance by the principal. Should a claim arise, the surety will be obligated to investigate; however, the principal must indemnify the surety for any damages/losses that may occur. Being aware of this obligation before signing is very important.