SURETY BONDS
A Surety Bond is a three-party agreement between the Surety, (the insurance company) Obligee (the beneficiary under the bond), and Principal (applicant). Suretyship is an agreement in which one party (Surety) guarantees itself to a second party (Obligee) to respond for the debt, performance or a default of a third party (Principal). Surety, is therefore, a credit relationship and should not be confused with insurance.
Benefits of a surety bond to an obligee:
- provides independent pre-qualification
- guarantees compliance and performance provides financial protection
Benefits of a surety bond to the Principal:
- does not tie up Working Capital
- less expensive than any other form of security eg. L.O.C.
- Surety provides additional resources to the principal when dealing with the obligee on issues
Surety's prequalification:
- Character (reputation; references)
- Capacity (experience; skills & ability)
- Capital (ability to suffer a loss; ability to deal with short term cash flow problems; profitability/loss history
How does the Surety protect itself?
The Surety Company protects itself by having the principal sign an indemnity agreement that gives the Surety the right to pursue the principal for losses it may sustain on its behalf. The Surety may look at both corporate and personal indemnities.
The Indemnity Agreement is found within the bond application, or within a General Deed of Indemnity.
