We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What does a Surety Company do?

By C. Mitchell
Updated: May 16, 2024
Views: 10,221
Share

In many long-term contracts, particularly those for construction projects and corporate financing, parties often want assurance that the bargain will be lived up to before they are willing to commit their time and resources. A surety company is a company that acts as a sort of insurance agent for these kinds of contracts. In most instances, the party who is bearing the brunt of the contract’s obligations — the construction company, for instance, or the financier — will secure what is known as a surety bond before finalizing a contract. Surety bonds are financial instruments that guarantee performance of contracted goods and services. A company that issues a surety bond assumes responsibility for the contract if the bond holder defaults.

Surety bonds are a very common way of insuring contracts. Most of the time, entities like cities and municipalities will not enter into contracts with contractors like construction companies unless the contractors have retained the services of a surety company. It is usually too risky for a city to sink resources into starting road work, for instance, or beginning construction on a bridge or building, only to have the construction company default or go bankrupt before completion. When a company has a surety bond, the city knows it can recoup its losses if a worst-case scenario were to happen.

The services of a surety company are not always easy to procure. When a surety company issues a surety bond, it accepts liability for any default, which usually comes at quite a cost. A surety bond agency will typically begin by assessing the risk of contract default, and the potential costs of that default over time. Then, it will set a premium rate that the contracting party must pay, usually on an annual or monthly basis. A surety premium works a lot like an insurance premium in that the bondholder pays the premium in order to secure the bond company’s indemnity and surety bond performance.

Working with contractors, surety companies set premiums that will be fair and achievable. Premiums vary based on contractor size, project duration, and available financing, among other things. Sometimes a surety company will also offer other sorts of indemnity services to contractors, including fidelity bonding and general project insurance. The primary goal, however, is to insure the obligation, and to guarantee completion of the contracted project.

A surety company plays a crucial role in many contracts of civic importance. As such, they usually must be licensed by the government in order to operate. Most of the time, it is a state or local government insurance regulators handle surety company oversight and licensing.

Share
SmartCapitalMind is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
Share
https://www.smartcapitalmind.com/what-does-a-surety-company-do.htm
Copy this link
SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.

SmartCapitalMind, in your inbox

Our latest articles, guides, and more, delivered daily.