Surety - Wikipedia https://en.wikipedia.

org/wiki/Surety

Surety
In finance, a suret y , suret y bond or guarant y inv olv es a prom ise by one party to
assum e responsibility for the debt obligation of a borrower if that borrower defaults.
Usually , a suret y bond or suret y is a prom ise by a surety or guarantor to pay one party
(the obligee) a certain am ount if a second party (the principal) fails to m eet som e
obligation, such as fulfilling the term s of a contract. The surety bond protects the obligee
against losses resulting from the principal's failure to m eet the obligation. The person or
com pany prov iding the prom ise is also known as a "surety " or as a "guarantor".

Contents
Overview
Reason for having a guarantor
United States Industry
Miller Act in the United States
Right of subrogation
Distinction between a suretyship arrangement and a guaranty
Contract surety bonds
Commercial surety bonds
License and permit bonds
Court bonds
Public official bonds
Miscellaneous bonds
Business service bonds
Penal bonds
Electronic surety bonds
Timeline
History
See also
References
External links

Overview
A surety bond is defined as a contract am ong at least three parties: [1]

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the ob ligee: the party who is the recipient of an obligation

the principal: the primary party who will perform the contractual obligation
the surety: who assures the obligee that the principal can perform the task
European surety bonds can be issued by banks and surety com panies. If issued by banks
they are called "Bank Guaranties" in English and Cautions in French, if issued by a surety
com pany they are called surety / bonds. They pay out cash to the lim it of guaranty in the
ev ent of the default of the Principal to uphold his obligations to the Obligee, without
reference by the Obligee to the Principal and against the Obligee's sole v erified statem ent of
claim to the bank.

Through a surety bond, the surety agrees to uphold—for the benefit of the obligee—the
contractual prom ises (obligations) m ade by the principal if the principal fails to uphold its
prom ises to the obligee. The contract is form ed so as to induce the obligee to contract with
the principal, i.e., to dem onstrate the credibility of the principal and guarantee
perform ance and com pletion per the term s of the agreem ent.

The principal will pay a prem ium (usually annually ) in exchange for the bonding
com pany 's financial strength to extend surety credit. In the ev ent of a claim , the surety
will inv estigate it. If it turns out to be a v alid claim , the surety will pay and then turn to
the principal for reim bursem ent of the am ount paid on the claim and any legal fees
incurred. In som e cases, the principal has a cause of action against another party for the
principal's loss, and the surety will hav e a right of subrogation "step into the shoes of" the
principal and recov er dam ages to m ake up for the pay m ent to the principal. [2]

If the principal defaults and the surety turns out to be insolv ent, the purpose of the bond is
rendered nugatory . Thus, the surety on a bond is usually an insurance com pany whose
solv ency is v erified by priv ate audit, gov ernm ental regulation, or both.

A key term in nearly ev ery surety bond is the penal sum. This is a specified am ount of
m oney which is the m axim um am ount that the surety will be required to pay in the ev ent
of the principal's default. This allows the surety to assess the risk inv olv ed in giv ing the
bond; the prem ium charged is determ ined accordingly .

Surety bonds also occur in other situations, for exam ple, to secure the proper perform ance
of fiduciary duties by persons in positions of priv ate or public trust.

Reason for having a guarantor

A surety m ost ty pically requires a guarantor when the ability of the prim ary obligor, or
principal, to perform its obligations to the obligee (counterparty ) under a contract is in
question or when there is som e public or priv ate interest that requires protection from the
consequences of the principal's default or delinquency . In m ost com m on law jurisdictions, a
contract of surety ship is subject to the Statute of Frauds (or its equiv alent local laws) and is
unenforceable unless it is recorded in writing and signed by the surety and by the
principal.

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United States Industry

The SFAA published US and Canadian H1 surety results on 9 -5-2 01 9 . [3] Direct written
prem ium totaled $3 .5b and a direct loss ratio of 1 8.2 %, highlighting strong profitability in
the surety industry . The industry rem ains highly fragm ented with ov er 1 00 com panies
directly writing surety bonds with new m arket entrants entering or reentering on a fairly
com m on basis.

As of 2 009 annual US surety bond prem ium s am ounted to approxim ately $3 .5 billion. [4]
State insurance com m issioners are responsible for regulating corporate surety activ ities
within their jurisdictions. The com m issioners also license and regulate brokers or agents
who sell the bonds. These are known as producers; in the United States the National
Association of Surety Bond Producers (NASBP) is a trade association which represents this
group.

In 2 008, the New York Tim es wrote "posting bail for people accused of crim es in exchange
for a fee, is all but unknown in the rest of the world". [5]

Miller Act in the United States

In the United States, the Miller Act m ay require a surety bond for contractors on certain
federal construction projects; in addition, m any states hav e adopted their own "Little
Miller Acts". [6] The surety transaction will ty pically inv olv e a producer; in the United
States the National Association of Surety Bond Producers (NASBP) is a trade association
that represents such producers.

Right of subrogation
If the surety is required to pay or perform due to the principal's failure to do so, the law will
usually giv e the surety a right of subrogation, allowing the surety to "step into the shoes of"
the principal and use the surety 's contractual rights to recov er the cost of m aking
pay m ent or perform ing on the principal's behalf, ev en in the absence of an express
agreem ent to that effect between the surety and the principal.

Distinction between a suretyship arrangement and a

guaranty
Traditionally , a distinction was m ade between a surety ship arrangem ent and that of a
guaranty . In both cases, the lender gained the ability to collect from another person in the
ev ent of a default by the principal. Howev er, the surety 's liability was joint and prim ary
with the principal: the creditor could attem pt to collect the debt from either party
independently of the other. The guarantor's liability was ancillary and deriv ativ e: the
creditor first had to attem pt to collect the debt from the debtor before looking to the
guarantor for pay m ent. Many jurisdictions hav e abolished that distinction, in effect
putting all guarantors in the position of the surety .

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Contract surety bonds

Contract bonds, used heav ily in the construction industry by general contractors as a part
of construction law , are a guaranty from a Surety to a project's owner (Obligee) that a
general contractor (Principal) will adhere to the prov isions of a contract. [7 ] The Associated
General Contractors of Am erica, a United States trade association, prov ides som e
inform ation for their m em bers on these bonds. Contract bonds are not the sam e thing as
contractor's license bonds, which m ay be required as part of a license.

Included in this category are bid bonds (guaranty that a contractor will enter into a
contract if awarded the bid); perform ance bonds (guaranty that a contractor will perform
the work as specified by the contract); pay m ent bonds (guaranty that a contractor will
pay for serv ices, particularly subcontractors and m aterials and particularly for federal
projects where a m echanic's lien is not av ailable[8] ); and m aintenance bonds (guaranty
that a contractor will prov ide facility repair and upkeep for a specified period of tim e [9] ).
There are also m iscellaneous contract bonds that do not fall within the categories abov e,
the m ost com m on of which are subdiv ision and supply bonds. [10] Bonds are ty pically
required for federal gov ernm ent projects by the Miller Act and state projects under "little
Miller Acts". [11] In federal gov ernm ent, the contract language is determ ined by the
gov ernm ent. In priv ate contracts the parties m ay freely contract the language and
requirem ents. Standard form contracts prov ided by Am erican Institute of Architects (AIA)
and the Associated General Contractors of Am erica (AGC) m ake bonding optional. [11] If the
parties agree to require bonding, additional form s such as the perform ance bond contract
AIA Docum ent 3 1 1 prov ide com m on term s. [11]

Losses arise when contractors do not com plete their contracts, which often arises when the
contractor goes out of business. Contractors often go out of business; for exam ple, a study
by BizMiner found that of 853 ,3 7 2 contracts in the United States in 2 002 , 2 8.5% had
exited business by 2 004 . [12] The av erage failure rate of contractors in the United States
from 1 9 89 to 2 002 was 1 4 percent v ersus 1 2 for other industries. [13]

Prices are as a percent of the penal sum (the m axim um that the surety is liable for)
ranging from around one percent to fiv e percent, with the m ost credit-worthy contracts
pay ing the least. [14] The bond ty pically includes an indem nity agreem ent whereby the
principal contractor or others agree to indem nify the surety if there is a loss. [14] In the
United States, the Sm all Business Adm inistration m ay guaranty surety bonds; in 2 01 3
the eligible contract tripled to $6.5 m illion. [15]

Commercial surety bonds

Com m ercial bonds represent the broad range of bond ty pes that do not fit the classification
of contract. They are generally div ided into four sub-ty pes: license and perm it, court,
public official, and m iscellaneous.

License and permit bonds

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License and perm it bonds are required by certain federal, state, or m unicipal gov ernm ents
as prerequisites to receiv ing a license or perm it to engage in certain business activ ities.
These bonds function as a guaranty from a Surety to a gov ernm ent and its constituents
(Obligee) that a com pany (Principal) will com ply with an underly ing statute, state law,
m unicipal ordinance, or regulation.

Specific exam ples include:

Contractor’s license bonds, which assure that a contractor (such as a plumber, electrician,
or general contractor) complies with laws relating to his field. In the United States, bonding
requirements may be at federal, state, or local level.[16]
Customs bonds, including importer entry bonds, which assure compliance with all relevant
laws, as well as payment of import duties and taxes.
Tax bonds, which assure that a business owner will comply with laws relating to the
remittance of sales or other taxes.
Reclamation and environmental protection bonds
Broker’s bonds, including Insurance, Mortgage, and Title Agency bonds
ERISA (Employee Retirement Income Security Act) bonds
Motor vehicle dealer bonds
Freight broker bond
Money transmitter bonds
Health spa bonds, which assure that a health spa will comply with local laws relating to their
field, as well as refund dues for any prepaid services in the event the spa closes.

Court bonds
Court bonds are those bonds prescribed by statute and relate to the courts. They are
further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of
litigation and are posted by parties seeking court rem edies or defending against legal
actions seeking court rem edies. Fiduciary , or probate, bonds are filed in probate courts and
courts that exercise equitable jurisdiction; they guaranty that persons whom such courts
hav e entrusted with the care of others’ property will perform their specified duties
faithfully .

Exam ples of judicial bonds include appeal bonds, [17 ] supersedeas bonds, attachm ent bonds,
replev in bonds, injunction bonds, Mechanic's lien bonds, and bail bonds. Exam ples of
fiduciary bonds include adm inistrator, guardian, and trustee bonds.

Public official bonds

Public official bonds guarantee the honesty and faithful perform ance of those people who
are elected or appointed to positions of public trust. Exam ples of officials som etim es
requiring bonds include: notaries public, treasurers, com m issioners, judges, town clerks,
law enforcem ent officers, and Credit Union v olunteers.

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Miscellaneous bonds
Miscellaneous bonds[18] are those that do not fit well under the other com m ercial surety
bond classifications. They often support priv ate relationships and unique business needs.
Exam ples of significant m iscellaneous bonds include: lost securities bonds, hazardous waste
rem ov al bonds, credit enhancem ent financial guaranty bonds, self–insured workers
com pensation guaranty bonds, and wage and welfare/fringe benefit (Union) bonds.

Business service bonds

Business serv ice bonds are surety bonds which seek to safeguard a bonded entity 's clients
from theft. These bonds are com m on for hom e health care, janitorial serv ice, and other
com panies who routinely enter their hom es or businesses. While these bonds are often
confused with fidelity bonds, they are m uch different. A business serv ice bond allows the
bonded entity 's client to claim on the surety bond when the client's property has been
stolen by the bonded entity . Howev er, the claim is only v alid if the bonded entity 's
em ploy ee is conv icted of the crim e in a court of law. Additionally , if the surety com pany
pay s a claim on the bond, they would seek to be reim bursed by the bonded entity for all
costs and expenses incurred as a result of the claim . This differs from a traditional fidelity
bond where the insured (bonded entity ) would be responsible for pay ing the deductible
only in the case of cov ered claim up to the policy lim it.

Penal bonds
The penal bond is another ty pe of the bond that was historically used to assure the
perform ance of a contract. They are to be distinguished from surety bonds in that they did
not require any party to act as surety —hav ing an obligee and obligor sufficed. One
historically significant ty pe of penal bond, the penal bond with conditional defeasance,
printed the bond (the obligation to pay ) on the front of the docum ent and the condition
which would nullify that prom ise to pay (referred to as the indenture of defeasance
—essentially , the contractual obligation) on the back of the docum ent. [19] The penal bond,
although an artifact of historical interest, fell out of use by the early part of the nineteenth
century in the United States. [20]

Electronic surety bonds

In certain situations, an Electronic Surety Bond (ESB) can be used in lieu of a traditional
paper surety bond. In 2 01 6 , the Nationwide Multistate Licensing Sy stem and Registry
(NMLS) initiated a sy stem for the issuance, tracking, and m aintenance of ESBs in support
of som e licenses being m anaged through the NMLS. This new online sy stem speeds bond
issuance and decreases paperwork, am ong other potential benefits.

Timeline
The NMLS ESB initiativ e began on January 2 5, 2 01 6 when surety bond com panies and
prov iders were able to begin the account creation process. The second phase began on

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Septem ber 1 2 , 2 01 6 when an initial group of nine state regulatory agencies began
accepting ESBs for certain license ty pes. This initial rollout included agencies in Idaho,
Indiana, Iowa, Massachusetts, Texas, Verm ont, Washington, Wisconsin, and Wy om ing.

On January 2 3 , 2 01 7 , another group of twelv e state agencies were added to allow ESB
capability for certain license ty pes. This group included agencies in Alaska, Georgia,
Illinois, Indiana, Louisiana, Minnesota, Mississippi, Montana, North Carolina, North
Dakota, Rhode Island, and South Dakota. Minor upgrades were also com pleted early in
2 01 7 . The ty pes of licenses transitioning to ESBs and the im plem entation tim elines v ary
by licensing agency . The NMLS plans to roll out additional state agencies and update the
sy stem with added functionality ov er tim e. [21]

History
Indiv idual surety bonds represent the original form of surety ship. The earliest known
record of a contract of surety ship is a Mesopotam ian tablet written around 2 7 50 BC.
Ev idence of indiv idual surety bonds exists in the Code of Ham m urabi and in Baby lon,
Persia, Assy ria, Rom e, Carthage, am ong the ancient Hebrews and (later) in England.

The Code of Ham m urabi, written around 1 7 9 0 BC, prov ides the earliest surv iv ing known
m ention of surety ship in a written legal code.

Surety ship was not alway s accom plished through the execution of a bond. Frankpledge, for
exam ple, was a sy stem of joint surety ship prev alent in Mediev al England which did not
rely upon the execution of bonds. [22]

The first Corporate Surety , the Guarantee Society of London, dates from 1 84 0. [23][24]

In 1 86 5, the Fidelity Insurance Com pany becam e the first US Corporate Surety com pany ,
but the v enture soon failed.

In 1 89 4 congress passed the Heard Act which required surety bonds on all federally funded
projects. In 1 9 08 The Surety Association of Am erica, now The Surety & Fidelity
Association of Am erica (SFAA) was form ed to regulate the industry , prom ote public
understanding of and confidence in the surety industry , and to prov ide a forum for the
discussion of problem s of com m on interest to its m em bers. [25] SFAA is a licensed rating or
adv isory organization in all states and is designated by state insurance departm ents as a
statistical agent for the reporting of fidelity and surety experience. The SFAA is a trade
association consisting of com panies that collectiv ely write the m ajority of surety and
fidelity bonds in the United States. Then in 1 9 3 5 the Miller Act was passed replacing the
Heard Act. The Miller Act is the current federal law m andating the use of surety bonds on
federally funded projects.

See also
Co-signing

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Demand guarantee
Estreat
Fidelity bond
Fiduciary
Guarantee
Indemnity
Insurance
Loan guarantee
Penal bond
Performance bond
Personal guarantee
Negotiable Instrument
Submittals (construction)
Shop drawing
Testator
Lien waiver

References
1. "Q&A The Legal Basics of Surety Bonds" (http://www.crossagency.com/customer-service/res
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2016-03-21.
2. "Right Of Surety To Subrogation Against Third Party" (http://scholarlycommons.law.wlu.edu/wl
ulr/vol17/iss1/10/). scholarlycommons.law.wlu.edu. Retrieved 2016-03-21.
3. https://www.surety.org/news/79628/2nd-Quarter-2019-Results-posted-for-Members-and-
Subscribers.htm
4. "About the Industry" (https://web.archive.org/web/20090426045820/http://www.surety.org/mai
n.cfm?catid=2&lid=0). The Surety & Fidelity Association of America. Archived from the original
(http://www.surety.org/main.cfm?catid=2&lid=0) on 2009-04-26. Retrieved 2009-07-17.
5. Liptak, Adam (Jan 29, 2008). "Illegal Globally, Bail for Profit Remains in U.S." (https://www.nyti
mes.com/2008/01/29/us/29bail.html?pagewanted=all&_r=1) The New York Times.
ISSN 1553-8095 (https://www.worldcat.org/issn/1553-8095). Retrieved 2018-08-13.
6. Schubert L. (2003). Q&A: The Legal Basics of Surety Bonds (https://web.archive.org/web/201
50416235944/http://www.crossagency.com/crossagency/tempFile/legal_basics.pdf).
Construction Executive.
7. "Contract Surety Bonds" (https://web.archive.org/web/20120425161711/http://www.zurichna.c
om/internet/zna/SiteCollectionDocuments/en/Products/surety/093579ContractSuretybonds.p
df) (PDF). Zurich. Archived from the original (http://www.zurichna.com/internet/zna/SiteCollecti
onDocuments/en/Products/surety/093579ContractSuretybonds.pdf) (PDF) on April 25, 2012.
Retrieved August 13, 2012.
8. Gantt, Paul H.; Wallick, Robert D.; Proctor, James M. (1968). "Problems of Private Claimants
Under Miller Act Payment Bonds" (http://scholarship.law.wm.edu/wmlr/vol9/iss4/13/). William
& Mary Law Review. 9 (4). ISSN 0043-5589 (https://www.worldcat.org/issn/0043-5589).

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9. "Bond Claim Filing for State, County and Municipal Lien Claims" (http://www.zlien.com/bond-c
laims/). zlien. Retrieved 2015-11-23.
10. "Bond Resources" (http://www.tdi.texas.gov/commercial/pcbond.html#type). Texas
Department of Insurance. Retrieved August 13, 2012.
11. Dan Donohue and George Thomas. (1996). Construction Surety Bonds In Plain English (htt
p://www.attny.com/gci32djd.html). Webcite archive (https://www.webcitation.org/6GcDJ89X2?
url=http://www.attny.com/gci32djd.html).
12. Surety Information Office. (2009). The Importance of Surety Bonds in Construction (http://ww
w.sio.org/pdf/importanceof.pdf).
13. McIntyre M. (2007). Why Do Contractors Fail (http://suretyinfo.org/pdf/CBO-whyfail.pdf).
Construction Business Owner.
14. Donohue D., Thomas G. (1996). How Surety Bonds Work (http://www.attny.com/gciart2.html).
Archived at Webcite (https://www.webcitation.org/6GcER6YjS?url=http://www.attny.com/gciart
2.html).
15. "Surety bonds help businesses grow on contract success" (https://web.archive.org/web/2013
1230235152/http://www.heraldnet.com/article/20130501/SCBJ14/705019987/1015/BIZ04).
SBA News. The Herald Business Journal. Archived from the original (http://www.heraldnet.co
m/article/20130501/SCBJ14/705019987/1015/BIZ04) on 2013-12-30.
16. (2006). Contractor's State License Bonds: Desk Reference, p. xv (https://books.google.com/b
ooks?hl=en&lr=&id=agx-rA6-ls4C&oi=fnd&pg=PR3#v=onepage&q&f=false). American Bar
Association.
17. Rendleman D. (2006). A Cap on the Defendant's Appeal Bond?: Punitive Damages Tort
Reform (http://scholarlycommons.law.wlu.edu/cgi/viewcontent.cgi?article=1094&context=wluf
ac). Washington & Lee University School of Law
18. O'Neal-Coble, Leslie (1994). The Most Important Questions a Surety Can Ask ab out
Miscellaneous Bonds (https://books.google.rs/books?id=g0nUWVmfa3UC&pg=PR2&lpg=PR
2&dq=types+of+miscellaneous+bonds&source=bl&ots=gmmwZp4i0Y&sig=9RyPppE2-Jeu
Dle5payntZAG9h4&hl=en&sa=X&ved=0ahUKEwi57Y3_lN7MAhWKJhoKHaZQCuQQ6AEISDA
H#v=onepage&q=types%20of%20miscellaneous%20bonds&f=false). Chicago, Illinois:
American Bar Association. ISBN 0-89707-937-X. Retrieved 16 May 2016.
19. Biancalana, Joseph, “The Development of the Penal Bond with Conditional Defeasance,” 26
J. Legal His. 103 (2005), available at http://papers.ssrn.com
/sol3/papers.cfm?abstract_id=918531
20. Curtis Nyquist, A Contract Tale from the Crypt, 30 Hous. L. Rev. 1205, 1233 (1993)
21. "NMLS Electronic Surety Bond" (http://mortgage.nationwidelicensingsystem.org/Pages/esbt.
aspx). mortgage.nationwidelicensingsystem.org. Retrieved 2017-02-24.
22. "Definition of FRANKPLEDGE" (http://www.merriam-webster.com/dictionary/frankpledge).
www.merriam-web ster.com.
23. Gallagher, Edward Graham (2000). The Law of Suretyship. American Bar Association. p. 27.
24. "The Guarantee Society Ltd" (http://www.aviva.com/about-us/heritage/companies/guarantee-
society/). Aviva. Retrieved August 13, 2012.
25. "Introduction" (http://suretyinfo.org/?page_id=573). suretyinfo.org. Retrieved 2016-03-23.

External links
Surety Bonds (https://curlie.org/Business/Financial_Services/Surety_Bonds/) at Curlie

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