What Is a Surety Bond?
A bond is a guarantee of the performance of a contract or other obligation. Bonds are three party instruments. The Surety guarantees an Owner (Obligee) that the Contractor (or bonded Principal) will perform its obligations per the contractual agreement. A bond is often an instrument of pre-qualification, informing the Obligee that a bonded Principal has the experience and financial strength to successfully complete a given obligation.
Insurance is based on the actuarial probability of loss. This loss will be funded by the pooled, paid-in premiums of the risk pool’s membership or policyholders. Surety bases its risk decisions on an analysis of individual risks, and assumes that if the risks are properly underwritten there will not be losses. Underwriting consists of an evaluation of a contractor’s financial strength, experience, work program and character. Surety premiums are based on the evaluation of a given risk and the acceptance of that risk. Insurance premiums are actuarially based and predicated on an assumed loss experience calculation.
