Surety Bond Basics – Part 2

In my previous blog Surety Bond Basics – Part 1, we looked at two frequently asked questions relating to bonds.  Here are several others that are also very common:

Why do surety bonds need to be underwritten?

A surety company must determine the risk of a loss occurring if the principal is unable to satisfy the obligation under the bond. Since a surety bond is an extension of credit, the surety company must review the principal’s financial information and business experience to determine if certain requirements are met to support the bonded obligation. This procedure is known as the underwriting process. Just as a bank evaluates loan applications, surety company underwriters evaluate risks in a similar way by considering business and personal financial statements, credit reports, credit references and other factors.

What is indemnity?

Indemnity agreements are a standard of the surety industry.  To indemnify means to make whole. Under common law, the surety company has the right to be indemnified by the principal in the event of a loss. The General Indemnity Agreement (GIA) carries out that right by stating that if the surety suffers a loss while providing a bond to the principal, the principal is obligated to make the surety “whole” by reimbursing any losses and expenses.

Surety companies usually require the president to sign on behalf of the company, all owners with over 10% ownership to sign personally, and the owners’ spouses to sign personally.  Personal indemnification establishes the principal’s private commitment to the business entity and to the surety company.