In order to obtain a surety bond, the company seeking the surety bond must qualify – that is meet the surety’s comprehensive underwriting standards.
Bonds are a three party agreement among the owner (the person or organization requiring the bond and referred to as the obligee), the company doing the work (referred to as the principal), and the surety company. Traditional insurance is a two-party agreement between the insurance company and the insured. With surety bonds, the premium is a fee for the surety’s prequalification services. With insurance, the premium is based on expected loss. There is no deductible on a surety bond, although the surety may require the company doing the work to reimburse the surety in the event of claims payment.
Prequalification is an in-depth look at the company’s entire business operation to determine the company’s ability to meet current and future contractual and financial obligations. Basically, underwriting is a look at the three Cs of prequalification:
- Capital, which looks at the company’s financial strength,
- Capacity, which analyzes the company’s ability to perform the contract, and
- Character, which is a look at the company’s reputation.