Q: What is a surety bond?

A: There are many types or classes of surety bonds but essentially a bond is an instrument designed chiefly to guarantee the integrity and honesty of the principal, their ability, financial responsibility, and their compliance with the law or contract. A mortgage broker or lender bond is a license & permit bond which guarantees that individuals granted a license or permit to operate a business or exercise a privilege will meet the obligations under that license or permit. A surety bond is not insurance, it is an extension of credit.

Q: Who is involved in a surety bond?

A: There are three main parties involved in a surety bond. First is the Surety, the party obligating itself to the second party, the Obligee who is requiring the bond, to answer for the default of the third party, called the Principal.

Q: Why do I have to get a surety bond?

A: For a license and permit bond there is an obligee, generally a state agency, which has required all license holders (or applicants) to post a surety bond with their application.

Q: What is an indemnity agreement?

A:  Because bonds are not insurance but a guarantee, a contact is needed to define the agreement. The indemnity agreement is the legal contact that the surety has created to ensure that both parties are aware of the conditions of such an agreement as well as if that agreement is broken (i.e. a claim is made on a surety bond). By signing the indemnity agreement the principal or individuals listed on the agreement are verifying that they will reimburse the surety company in the event of a loss.

Q: How does a claim occur on a bond?

A: If the Principal (the party who has the bond) violates one of the rules, guidelines, statutes, or laws that they agreed to obey (usually referred to in the application or the bond form) then a claim can be made on the bond. If the Surety pays a claim made on the bond then it is the Principal’s responsibility to reimburse the Surety for the loss.

Q: Why does my spouse have to sign the indemnity agreement?

A: Even though the spouse might not have any part of the business operations or ownership the surety requires all spouses to sign to secure the joint personal assets. Due to fraud and unethical business practices the sureties now require a corporate indemnity, a personal indemnity, and spousal indemnity to ensure lost funds will be reimbursed.

Q: What does a bond do for me (the principal or applicant)?

A: The surety bond fulfils the obligation that the Obligee has set forth. A surety bond is not insurance, it is a line of credit and therefore it does not protect the principal against loss. It is a guarantee that the principal will comply and uphold the law or contract.

Q: Why can’t I just get a quote for how much the bonds will cost?

A: The cost of surety bonds is dependant upon a number of factors and thus cannot be quoted until all of these factors have been reviewed. Some of the items that will affect the cost of the bonds are; credit scores of applicants, net worth of company and principals, experience in the industry, etc.

Q: Why do you need all of this personal information to apply for a surety bond?

A: Because of the nature of a surety bond (see what a surety bond is for additional information) the surety company must review the applicant’s financial standing, industry experience, credit history, and the like to properly determine the probability of a loss. This process is the underwriting process that each applicant must go through similar to how a bank would evaluate a loan application (surety bonds are an extension of credit).