A surety company provides bonds that are used as a guarantee that a business or individual will comply with an agreement to perform a particular act. Most surety companies are divisions within an insurance group although some surety companies provide bonding services only.
TL;DR (Too Long; Didn't Read)
A surety company is a bit like an insurance company. It provides a financial guarantee that a company or individual will do what he said he would do in a loan agreement or contract.
Types of Surety Bonds
Surety bonds are used in a variety of situations, and the list of specific types of bonds is numerous. In general, surety bonds can be classified in three areas of activity: commercial, contract and court. Bonds used in commercial activities are usually required as a prerequisite to obtain a license, such as for a building contractor. Contract bonds are generally required for large or governmental construction projects and cover all phases of the project, such as bidding, construction and payment for materials and subcontractors.
Court bonds are used in legal proceedings for such matters as securing a person’s appearance at a criminal trial – bail bonds – and are sometimes required of estate executors in the form of fiduciary bonds. Because the laws and business practices related to each area of activity differ significantly, surety companies usually only write bonds in one specific area.
Surety Company Licensing Requirements
A surety company must be licensed in order to write a surety bond. Licensing is done at the state level, usually through the state’s department of insurance. A surety company is licensed in the state where it has its principal place of business and may be required to obtain a license in other states, depending on the type of bond and where the activity subject of the bond is performed. Surety companies that do business with any federal agency must have a certificate of authority from the Treasury Department.
Information on Surety Companies
Information about a surety company is available from several sources. The department of insurance in the state where the surety company is licensed should have information about the company. As part of their regulatory and licensing responsibilities, state insurance departments conduct regular reviews of surety companies, with the results of the reviews generally made available to the public.
Surety companies that contract with government agencies must go through a financial review by the Treasury Department to determine their surety bond writing limits. A list of qualified sureties – called the Treasury List – is published every July 1. A third source of information on surety companies is from private rating organizations, such as A.M. Best Company, Dun & Bradstreet and Moody Investor's Service. Such organizations provide company profiles, credit ratings and industry analysis and comparisons; however, unlike information from government sources, a private company usually requires payment of a fee for its information.
Role of a Surety Company
After a surety company has written a particular bond, no further action is generally required of the company unless there is a claim made against the bond such that the company or individual who required the bond failed to perform as promised. For example, in the case of a construction project, the owner may declare the contractor in default before the project is completed.
The surety company that bonded the contractor will have to investigate the situation and determine if there is a default. Depending on the outcome of the investigation, the surety company may be obligated to pay the owner monetary damages up to the amount of the bond. If payment is made on the bond, the surety company will seek to collect the money from the contractor.