Facts about Surety Bonds
- It is common for a surety to request the indemnity of the owners of a closely held corporation. Typically, the spouse's indemnity also is required because personal assets are jointly owned. The two main reasons for this requirement are that the surety requires all personal assets to be available to back the guarantee and that there is less chance a principal will avoid its responsibilities if its personal assets are at stake.
- If an underwriter is unable to approve a bond request based on the qualifications given by the principal, the company may suggest depositing some form of collateral security as an inducement to write the bond. In practice, many bonds are written on this basis, particularly ones that are considered financial guarantees.
- A financial guarantee bond obligates the surety to pay a certain amount of money if the principal does not perform its obligation. Examples include tax bonds and Medicare and Medicaid bonds.
- Construction bonds can be difficult to obtain because construction is a risky business even large, well-established contractors fail around 1/3 of contractor failures are contractors who have been in business over 10 years. Without construction bonds, the owners of the construction project would have to pay the associated costs of finding a new contractor to complete the work.
- If a contractor defaults, the bonding company may pay for a replacement contractor, finance the existing contractor, or provide technical and/or financial assistance.
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