Surety Bond Basics: Differences Between Bonds and Insurance Policies
Surety bonds and insurance policies are both forms of risk mitigation tools, but there are important distinctions between the two.
Insurance Policies: Two-Party Agreements
An insurance policy operates as a contract between the insured party and the insurance company, guaranteeing compensation in the event of a covered loss. While losses are expected, the policy aims to alleviate financial burdens through compensation.
Surety Bonds: Three-Party Agreements
A surety bond is also a contract, one that involves a three-party agreement between the person or party doing the work (principal), the person or party requiring the work (obligee), and the surety company providing the bond (surety). The bond guarantees that the principal will fulfill the contract, with the principal retaining the economic risk through indemnity. Surety bonds are written with the expectation that there will be no losses.
Defining the Roles in the Surety Relationship
Surety: Merchants Bonding Company serves as the surety, liable for the performance, debt or failure of duty by the principal.
Principal: The party obligated to fulfill the contract, bound to the obligee to perform or pay a debt. The principal works with an insurance agent to acquire a bond from a surety.
Obligee: The protected party, to whom the principal, and subsequently the surety, has become obligated. The obligee requires the principal to secure a surety bond for contract fulfillment.
Producers/Agents/Brokers: Insurance agents and brokers play a crucial role in connecting principals with surety bonds. They act as intermediaries between principals and surety companies.
Underwriters: Underwriters at surety companies work directly with agents and brokers on the principal's application and bond approval process. They assess the data and consider factors like risk feasibility, applicant conditions, and bond premiums.
How do I get a Surety Bond?
Surety bonds are issued by Merchants Bonding Company (Mutual) through insurance agents. Contact your local insurance agent or use our Find an Agent tool. They will guide you through the process, informing you of what documents and information are needed by the surety (Merchants Bonding Company (Mutual)) to underwrite your bond.