What is a Bond?

A bond is not an insurance policy, as often thought, but more like a bank loan, there are forms to complete, credit checks conducted, banking history reviewed and references checked before a bond is issued. This process is known as underwriting. A bank lends money and expects its money back with interest at the end of a specified period. With a bond, a surety lends its name for a service fee and expects the name to be returned untarnished when the obligation is completed. A surety does not expect losses, but selects only risks that are qualified and considered safe after a careful underwriting process. In the event of a loss or claim, the surety collects the bond amount from the principal (person bonded).

Types of Bonds

Surety Bonds-Covers faithful performance of a duty or completion of a contract.

Fidelity Bonds-Covers honesty of an employee in an employer/employee relationship (also known as Dishonesty Insurance).
Both types of bonds require the completion of an application. Based on the information provided, the underwriter will approve or disapprove the bond. It is very important that the application be completed as thoroughly and honestly as possible. As with a bank loan, in most cases the applicant will be required to furnish financial information. The underwriter may require collateral to write the bond. Collateral may be in the form of a letter of credit from a bank, certificates of deposit or cashier checks, and would be available to cover the amount of the bond should a loss occur. Surety bonds require much stricter underwriting thatn fidelity bonds, and the applicant is required to sign an indemnity statement to the underwriting surety company. This is similar to signing a bank loan application promising repayment of the bond amount.