The United States’ insurance industry incorporates subsidiaries and divisions of insurance companies that specialize in writing surety bonds as their main business function. Surety companies earn their business credentials through authorization from their state insurance commissioner in their home state as well as the bond issuance states. State departments of insurance maintain authority to govern surety companies that need to fulfill minimum capital standards and present periodic financial reports to all jurisdictions where they work while accepting market conduct investigations and various other regulatory tasks. For more information on obtaining surety bonds, visit AlphaSuretyBonds.com.
Insurance departments in each state regulate the mechanisms that transfer risks whether through surety bonds or traditional insurance policies including property insurance. The standard insurance mechanism functions as a two-side contract which pays out benefits for unexpected loss scenarios to its policyholders. The insurance premium calculation derives from the comparison between premium revenue and projected loss expenses. Surety companies run their business operations through distinct frameworks. A surety bond constitutes a three-party contract which exists to stop losses from occurring. The surety maintains secondary responsibility to pay if the principal fails to fulfill its bonded obligation but does not take on the primary obligation.
The surety company treats its underwriting activities as credit extension similar to standard lending operations. The surety in contract surety examines more than 10 carefully selected factors about the contractor’s financial strength and management capacity. The surety evaluates various elements before deciding if bonding approval should be granted and determining the extent of coverage that should apply.
The surety provides bond coverage to contractors under the condition that the bonded contractor will succeed in completing their work requirements and simultaneously holds an executed indemnity agreement to protect the surety from potential losses.
A General Agreement of Indemnity (GIA) serves as a binding legal contract which connects surety companies with contractors. Under the General Agreement of Indemnity, the contractor and other indemnitors who include company owners and their spouses and affiliated businesses promise to pay back the surety company for any losses or expenses it faces because of issuing bonds on their behalf.
To issue surety bonds the surety company needs both the principal (contractor) and associated parties to execute the General Agreement of Indemnity. The surety gains extensive rights through this agreement to examine assets and legal claims and obtain financial control over the contractor in case of default. Through the GIA the surety company secures risk mitigation by enabling it to seek reimbursement from the indemnitors.
Contractors need to analyze the GIA with great care due to its wide-ranging effects for signing purposes. Through construction bonding the GIA protects the surety against excessive risk by maintaining financial responsibility for both parties.
