The world of surety bonding may seem mysterious and complex. Let’s face it, it’s not like insurance. It’s actually more similar to banking. No wonder the subject is not well understood by the very people who need to know.
In this article we will cover some of the basics such as who the parties are and what they do so the subject does not seem so foreign.
Who is the “insured”? The insured is the party buying insurance. Therefore, in bonding there is no insured, instead there is a “principal.” This is the party whose actions the bond concerns. If your construction company needs a bond, it is the principal, the bond applicant.
The intermediary who assists you with your bonding need may be a bond producer, a bonding agent, or an insurance agent. In every case, the person is licensed by the state to process surety bond transactions.
The firm the agent works for is called an insurance agency or bonding agency. This entity provides the channel between the principal (bond applicant) and the surety, the bonding company, the provider of the bond and party holding the risk.
In the world of bonding, the term “company” is used to describe the bonding company. The agent and the agency would not be referred to as “the company” even if the name of the firm was the ABC Local Insurance Company Inc.
A reference to “the paper” relates to the bonding company. “Whose paper is the agency using?” This means “Who is the bonding company?”
Since the bonding company holds the exposure on the bond, it is their employee who makes the decision to approve or decline it. This person is called a surety underwriter or bond underwriter.
It is true that insurance agencies may employ individuals with underwriting expertise, and their title may be “underwriter.” They may even have some element of decision-making authority that has been delegated to them by the bonding company (referred to as “having the pen.”) But the fact remains that the ultimate seat of authority is the bonding company not the agency. It is worth knowing that when a bonding agent speaks with authority about what can or cannot be done. In reality, they must still ask the underwriter for permission. They always answer to the bonding company on all transactions that involve the surety.
When a contractor is asked “Who is your bonding company?” sometimes they give the name of their bonding agency. Now you know the difference!
Other areas of confusion: The owner of the construction company is not the applicant for bid and performance bonds. In the eyes of the surety, the construction company is the applicant because it is the entity named on the bonds.
It is true that sureties expect company owners to stand behind the transactions by providing personal indemnity. However, the underwriting process (decision-making) is primarily focused on the company, its history and capabilities. The personal factors surrounding the business owner are secondary.
We do not intend to diminish the importance of the bonding agent. The agent plays a critical role in gathering, shaping, and presenting the file for review by the underwriter – and they guide the process forward as bonds are needed. When you utilize a bonding specialist for your surety needs, you gain the expertise of an industry insider who understands the underwriting process and how to present your account in a fair and effective manner for the mutual benefit of the applicant and the bonding company.
OK, now it’s time for one of our famous Pop Quizzes! Choose the most appropriate word in each case:
1. When Elmer, the contractor, realized he would need a bond, he got right on the phone and called his (Principal / Agent).
2. Morty the underwriter had a few more questions and sent them to the (Surety / Bond Producer).
3. The (Surety / Bonding Agency) was not willing to hold any additional risk on the account.
4. Surety bonds (are / are not) insurance policies.
5. LaFawnduh, the (Underwriter / Agent), knew it was time to arrange for a new surety.
6. Thor, the Bonding Specialist, only used quality (Pens / Paper).
Bonus Question (Extra credit!): When all else failed, Moonbeam knew it was time to file a bond claim with the (Carrier / Insured).
2. Bond Producer
4. are not