Bonding - Frequently asked questionswhat is surety?Surety is a very specialized line of insurance that is created when a party guarantees performance of an obligation by another party. There are three parties to the agreement including the principal, obligee and surety insurance company.
COMMONLY USED BONDS
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How is suretyship different from more common lines of insurance? |
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. 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. In underwriting traditional insurance products the goal is "spread of risk." In suretyship, surety professionals view their underwriting as a form of credit so the emphasis is on pre-qualification and selection.
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How does a surety underwrite? |
Each surety company has its own guidelines and underwriting criteria. However, the following basic factors will be taken into consideration in some format.
Capacity. Does the applicant have the skill and ability to perform the obligation? Capital. Does the financial condition of the applicant justify approval of the particular risk? Character. Does the applicant's record show him to be of good character and likely to perform the obligation he or she assumes? |
WHAT IS PERSONAL INDEMNITY? |
It is common for a surety to request the indemnity of the owners of a closely held corporation. Typically, the spouse's indemnity also is required because personal assets are jointly owned. The two main reasons for this requirement are that the surety requires all personal assets to be available to back the guarantee and that there is less chance a principal will avoid its responsibilities if its personal assets are at stake.
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How does collateral security relate to a surety bond? |
If an underwriter is unable to approve a bond request based on the qualifications given by the principal, the company may suggest depositing some form of collateral as an inducement to write the bond.
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What is the Treasury List, or T-list, and how can I get a copy? |
Circular 570: Federal Treasury Listing of Qualified Sureties, also known as the T-list, provides a list of all surety companies qualified to write bonds on federal contract. Access the T-list online www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570.htm
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