What is a Surety Bond Claim?

You may have heard of the term corporate bond, but it is a very different concept from a corporate surety bond. A corporate bond is a type of bond issued by a corporation or business to raise capital for a number of reasons. M&A, business expansion, and adding to the general operating capital for the organization are just a few of the main reasons.

So,‘what is a corporate surety bond?’ In short, it’s another word for “surety bond.” Some people just happen to add the extra word.

How Does a Surety Bond Claim Work?

The main thing to understand about these bonds is that they protect the customer rather than the purchaser of the bond. For instance, in a contractor bond, a general contractor might purchase a bond, but they do not actually receive any form of protection from that bond. Instead, the customer or construction project manager/owner receives the protection, in case the contractor fails to live up to the terms of performance specified in the bond.

There is a third party in all contractual agreements as well, and that is the surety company. A surety company is, for the most part, an insurance company that also sells these bonds to clients. The involvement of the company doesn’t end with the sale of a bond to the contractor, however, because the surety must also be prepared to pay any claims made against that bond, should the contractor fail to live up to his/her obligations.

This same model is typical of almost all surety agreements – there will always be a principal (the contractor), an obligee (the protected party) and a surety (the insurance company) involved in the three-way contractual agreement that constitutes a bond arrangement. It is definitely advantageous for a principal to purchase a bond even though they receive no actual protection from the bond. In some cases, it’s actually required for a principal to have such a bond before being considered for hire. This is very common in the construction industry and it happens often that only those contractors who have purchased a bond are considered as potential candidates for receiving the work.

The bottom line on bonds is that they provide a guarantee of performance or the assurance that the principal will live up to the terms of an agreement between the principal and the obligee. Therefore, it protects the obligee against financial loss in the event the principal defaults on those terms. All three parties associated with the purchase of a bond will gain some kind of benefit: the principal receives hiring consideration, the obligee is protected against financial loss and the surety generates revenue from the sale of the bond.

NFP is your go-to bonding solution. If you have any questions about costs or how the process works, we are always glad to help. Learn more about performance bonds from our dedicated page.

How to Obtain a Bond

The first step in obtaining a bond is making sure you have financial statements prepared for a surety company to review. This will be necessary to determine your credit-worthiness and to establish that your company is responsible and reliable. It will help if you’ve been in business for several years, and if you have a good credit score, confirming your financial stability.

Next, you’ll need to find a surety company that will issue a bond to your company. While there are many such companies, you’ll have to find one authorized to sell the type of bond you need in the state where you’re doing business. You may want to check on the surety company’s business rating, it’s pricing for bonds and the turnaround time it requires for bond issuance.

Having found the right surety, you can then apply for a bond by filling out the required form and submitting it to the bonding company. If it approves your application, you will receive a copy of an indemnity agreement that specifies exactly what the bonding company will be responsible for if a claim is made against the bond. You’ll have to sign this indemnity agreement and return it to the company before a bond can be issued.

After signing the indemnity agreement, you’ll have to pay for the bond via an arrangement you make with the surety company. When the bond is actually issued, you will have to sign it because it is a legally binding contract between you, the surety company and a third party referred to as the obligee, who is the customer that will be using your professional services. Most bonds are renewable annually, which means that to maintain the coverage provided by the bond, you need to pay an annual premium to the company to keep it in effect.

You can start the bonding process by reaching out to us. Either fill out the online application or pick up the phone and call us at 855.999.7833. We’ll ask you a few questions and get the ball rolling right away. Some bonds can be finalized in-house to save you time and money.

Let us help you get the bond you need! Contact us now.