In many ways Surety is very simple; if I make a promise to someone and you guarantee that I will keep my promise, we have entered into a surety agreement. Using technical jargon found in a bond, you would be acting as the Surety, I would be acting as the Principal and the person that I made the promise to would be the Obligee. As such a surety bond differs from insurance because surety is a three party agreement. Essentially, the surety is a 3rd party guarantor.
My first Surety Agreement was with my father. As a 16 year old farm boy, I could not wait to buy my first pick-up truck! Unfortunately, the truck was too expensive for my small savings account, so I needed to get a loan from the bank. Without having any payment history and with no formal income, I did not qualify for a loan by myself. The bank required my father to co-sign on the loan which is when my entry into the world of Surety began. In that case, the Surety was my father, I was the Principal and the bank was the Obligee.
In order to create a Surety Bond, an agreement must exist between two parties clearly outlining the obligations of each party, such as the loan agreement in the case above. Legislative compliance can also be bonded.
The Surety Bond then guarantees the Principal’s obligations to the Obligee under the terms of the agreement, so long as the Obligee in turn fulfills its obligations to the Principal. In the bank loan example, the bank has loaned me money to buy a pick-up truck and I have agreed to repay the bank in monthly installments. If I fail to do so, the bank can look to my father (as the Surety) for payment.
However, that is not where the story ends. In the scenario above, my father would never co-sign a loan and allow me to default without first sitting me down and discussing how I was going to repay him. In my situation it was fairly informal, and yet it was WELL UNDERSTOOD that it would be very unpleasant for me if my father had to make payments on my behalf. I would be repaying him the full amount plus interest. In most Surety relationships there is a contract known as an Indemnity Agreement between the Principal and the Surety outlining the rights of the Surety to be repaid in a claim situation. This repayment requirement/agreement is one of the primary differences between Surety and Insurance.
Now that you understand the basics of how surety works, where could you use a bond?
If you would like to discuss the potential of using or creating a bond for an agreement that you have, please contact your Professional Surety Broker or a Trisura Guarantee Insurance Company representative.