Surety is NOT insurance..but what is a surety bond? Principal, Chad Rosenberg has the answer..
Hi I’m Chad Rosenberg, and Principal at Rosenberg and Parker. Surety is not insurance, and it’s not insurance for four important reasons. Number one is the number of parties involved. In insurance you have two parties, the insurer and the insured. Whereas in surety, you always have three parties, the principal, the obligee, and the surety company. The surety company is making a guarantee to the obligee that the principal will fulfill an obligation, and if they cannot, the surety company will step into their shoes and get that obligation finished. Number two is losses. In insurance, you know you are going to have losses, it’s a fundamental principal of insurance. Whereas in surety, we underwrite for no losses, much like a bank does. If we think a principal cannot fulfill their obligation, then we won’t write the bond. And number three is rate. Because we don’t underwrite for losses, rates cannot be actuarially determined like they can in insurance. Instead, our rates are like a fee like a bank would charge. And number four is indemnity. If the principal causes the surety company a loss, then the surety company has the right to go after the principal to be made whole under the indemnity agreement.
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