Bonding Company

What is a Bonding Company?

A bonding company guarantees a form of surety quite distinct from property and casualty insurance coverage for accident and injury losses. Bonding most commonly assures the performance and delivery of business services and activities in behalf of clients and customers of the bonded firm. In short, a surety bond enlists three parties: (1) an obligee (city, county, state or US government) who requires the bond as insurance in behalf of the public, (2) the principal (the bonded firm) who is extended credit toward claim payment, and (3) the surety who issues the bond and administers any claims against the bonded firm.

After paying a small percentage (1-10%) of the bond’s face or contract value, the bonded firm through an indemnity agreement pledges assets as collateral for claims against the principal. For valid client claims of business performance violations filed with the surety, the infringing party under bond must eventually make good on the claim – either directly with the claimant or with the bonding issuer that pays the claim.

This model differs from typical insurance where the uncollateralized policyholder pays periodic premiums and the insurer absorbs all the losses. Bonding companies incur NO claim losses. Surety firms make money by prudently pricing the bond to cover specific risks of claim frequency and severity against the principal’s credit rating and business experience.

Surety bonds can take thousands of forms depending on the hundreds of jurisdictions and the guaranteed types of business activity and terms of performance. Local requirements, pricing and certification data should all be well researched on a case-by-case basis. Bottom line, surety bonds protect the public, extend credit to principals, and earn revenues for sureties that properly price the bonds and administer claims.

Types of Bonding

Contract Bonding

Construction contractors and subcontractors engage projects involving large amounts of capital, material, equipment and manpower. Project delivery on time and on budget are critical. Contract bonding offers surety toward contract fulfillment in terms of bids, services provided, payments and delivery schedules.

Fidelity Bonding

Cleaning businesses by nature bring employees into client homes and premises. Fidelity bonding insures the principal against employee theft. Employee embezzlement coverage is also available, especially for money-handling enterprises.

Title and Other Bonding

Car dealers regularly reassign ownership title to sold vehicles. Title bonding offers surety in case of legal complications in the title assignment. Mortgage and freight brokers can purchase bonds protecting the public against their potential infringements of rules and regulations.

Quiz

1. Which situation is best covered by bonding?

A.
B.
C.
D.

2. Identify the parties to a surety bond.

A.
B.
C.
D.

3. Who absorbs loss on payment of claims against a surety bond?

A.
B.
C.
D.

4. Bonding requires a pledge of assets.

A.
B.

 

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