The fashion in which owners evaluate and manage risk on construction projects and make fiscally responsible decisions to ensure timely project completion are keys to their success. No private owner of a construction project can afford to gamble on a contractor whose responsibility is uncertain, or who could end up bankrupt halfway through the job. Furthermore, no public agency using the low-bid system in awarding public works contracts can be sure the lowest bidder is dependable.So how can this area of “uncertainty” be lessened? The answer lies in suretyship.

What is Suretyship?

Suretyship is a very specialized line of insurance that is created whenever one party guarantees performance of an obligation by another party.

What is a Surety Bond?

A surety bond is a written agreement where one party, the surety, obligates itself to a second party, the obligee, to answer for the default of a third party, the principal. There are many different types of surety bonds, but the two primary categories are as follows.

Contract (or Corporate) Surety Bond

The Contract (or Corporate) Surety Bond provides financial security and construction assurance on building and construction projects by assuring the project owner (obligee), that the contractor (principal), will perform the work and pay certain subcontractors, laborers, and material suppliers.

Who Are the Three Parties That Make Up the Surety Agreement?

1. The principal is the party that undertakes the obligation,

2. The surety guarantees the obligation will be performed, and

3. The obligee is the party who receives the benefit of the bond.

How is Suretyship Like Other More Common Forms of Insurance?

1. State insurance commissioners regulate them both, and

2. They both provide for financial loss.

How is Suretyship Different from More Common Forms of Insurance?

1. In traditional insurance, the risk is transferred to the insurance company. In suretyship, the risk remains with the principal. The protection of the bond is for the obligee.

2. In traditional insurance, the insurance company takes into consideration that a certain amount of the premium for the policy will be paid out in losses. In true suretyship, the premiums paid are "service fees" charged for the use of the surety company’s financial backing and guarantee.

3. In underwriting traditional insurance products the goal is to "spread the risk." In suretyship, surety professionals view their underwriting as a form of credit so the emphasis is on pre-qualification and selection.

Schiff, Kreidler-Shell:
Helping you to address today's Surety Issues