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SURETY BONDS INSURANCE

While insurance dates back several hundred years, suretyship is thousands of years old. Reference to it is found in several places in the Bible. Its need arose in normal transactions between people when an individual’s promise to perform a particular thing was not acceptable by itself. The guarantee of a third party was needed.

Until comparatively recent times, the surety was an individual, uncompensated for the favor he gave, except perhaps for the benefit of friendship or the opportunity to gain from the outcome of the particular agreement supported by his surety ship.

Around the latter part of the nineteenth century, corporations were formed to offer suretyship on a commercial basis for a charge. The personnel of the corporations were skilled in the pitfalls of guarantees and their contracts of suretyship were backed by the corporate assets. Their skills proved to be of definite help to those seeking suretyship. This was in marked contrast to the uninitiated personal surety whose impetuous act to help a friend often involved him in serious loss which he could ill afford. Furthermore, the corporate surety, through its financial strength, provided real security to the beneficiaries of the suretyship which the personal surety too often could not provide due to lack of funds when trouble arose.

Of additional benefit to those in whose favor the suretyship ran was the greater responsibility placed by the courts on a compensated corporate surety. Personal sureties were treated as favorites of the court, being absolved on the basis of defenses which the corporate surety was not permitted to use. The relief given to the personal surety often weakened or destroyed the benefits intended by the suretyship.

A surety is one who has agreed (in writing) to answer for the debt, default, or miscarriage of another. For example, in commercial dealings, the endorser of a note is a surety who has guaranteed to the lender that the maker of a note will repay it as promised. The person who guarantees that an accused person will appear in court is also a surety.

Neither of these situations, however, has to do with the insurance business sureties without monetary compensation. When an organization which is chartered as an insurance company engages to serve as a surety, for monetary consideration, it becomes an insurance matter, subject to the insurance laws of the respective states. Although the surety company writes only bonds which it believes will not result in losses, losses do occur. To this extent, there is an averaging process and hence, pooling is involved; this is the essence of insurance.

There are three parties to a surety bond. The bond is the joint and several obligation of the principal and the surety in favor of the obligee named in the bond. It is the bond of the principal as well as the bond of the surety. The principal promises to perform some function and the surety guarantees that he will. Thus, Highway Contractors (principal) and the Progressive Surety Company (surety) jointly promise the city of Springfield (obligee) that Highway Contractors will pave three miles of road in full accord with the terms and conditions of their contract (and specifications). It is important to note that the contract between the contractor and the city is the underlying obligation to the contract of suretyship and legally represents the consideration for the surety contract.

In suretyship, it is always the desire of the principal to perform some function or exercise some right under a contract, agreement, law, ordinance, or regulation to which he is to become subject voluntarily, as a necessity to the pursuit of his business, profession, or personal affairs. However, to do so, the principal must protect the obligee and sometimes others against loss that results from his improper performance or harm to the obligee (or other parties) in the principal’s pursuit of his desired function or right. To accomplish this end, the obligee calls upon the principal to furnish bond, joined in by a responsible surety.

Surety Bond - Bond that guarantees that someone will perform faithfully whatever he or she agrees to do, or that someone will make an agreed-upon payment to another party.

Supply Bond - Type of Surety bond that guarantees that a supplier will furnish supplies, products or equipment at an agreed-upon time and price.

Surety - In bonds, the party (often the insurance company) that agrees to be responsible for loss that may result if the principal does not keep his or her promise.

Please note that the precise coverage afforded is subject to the terms, conditions, and exclusions of the policy as issued. This explanation is intended only as a guide. This information is not intended to be considered investment, tax or legal advice. It is provided, for your education only. This is not an insurance contract. All terms and coverages are defined solely by your policy.

For more details, please call a PaulBalep representative toll-free 1-800-964-8614 to receive a free, no-obligation quote.

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