Traditionally, insurance is contract between two parties: the insurance provider and the insured. This two-party agreement stipulates that the insurance company will pay the losses incurred by the insured. In this scenario, the insured party (the principal) is covered by the insurance carrier (the obligor). However, suretyship is a three party contractual agreement. Although the principal acquires a surety bond from an insurance carrier, this bond ensures that the principal performs the required duties for a third party - the obligee. The insurance carrier writing the surety bond (still the obligor) guarantees that the principal will perform the agreed upon duties to the obligee. The addition of the third party obligee makes suretyship a unique type of insurance.
When underwriting most types of insurance, the insurance carrier will employ an actuarial process to calculate the average likelihood and resulting damages of a loss. The premium will then be adjusted based on the projected losses that the insurer expects to incur during the period of coverage. Generally, the more likely a loss is to occur, the higher the premium will be. Unlike traditional insurance, all surety bonds are written with the expectation of no losses. Although there can be claims against a surety bond, these claims are very rare. Therefore, the premium for a surety bond is based solely on underwriting expenses and likelihood of loss does not factor into the premium.
Claims against a surety bond are far less common than claims in other types of insurance because surety bonds are only written for qualified individuals whom are considered safe risks. Unlike other forms of insurance, sureties are selective. For most types of insurance, insurers will write any policy, and they will adjust the premium accordingly based on the degree of risk. When writing surety bonds, a surety agent has the power to choose which candidates are qualified to receive a surety bond and which candidates pose too much of a risk to become bonded. If the risk exposure for a surety bond candidate is too high, the bonding agent can elect to refuse to write a bond for this unqualified candidate. Due to this selection process, concerned parties can be confident that any individual holding a surety bond has been endorsed as a qualified candidate by the bonding agency. As previously referenced, the premium that bonded individuals pay covers the expenses of this selection process.
One final difference between insurance and suretyship comes from the presence of subrogation in suretyship. Subrogation is an insurance principle in which the insurance provider can recover its losses from another party. In the case of surety bonds, the insurance provider has the ability to recover any losses which it has been forced to pay out from the insured party (the principal). Initially, the insurance provider is obligated to use its own funds to pay out the damages to the obligee, but then the insurer can turn to the principal to recover these damages. In this sense, suretyship is similar to a lending of credit from the insurance provider to the principal. In most other forms of insurance, the insurance carrier does not have the opportunity to recover any of the damages that it has been obligated to pay out.
These key differences differentiate suretyship from other forms of insurance. Surety bonds serve as a necessary and practical form of credit lending. They can be employed by contractors, probate courts, government agencies, and many other individuals and institutions. For help with your next surety bond, be sure to come to the experts at Triest Agency. Call Matthew Foote, Senior Account Executive, today at 843-303-9173 or visit our website http://www.triestagency.com.