What Is A Surety Bond ?
Surety Bond Definition – a Surety Bond is a third party guarantee that an individual or a company will fulfill their obligations. The surety bond is a three party agreement between the principal (the person or company requesting the bond), the obligee (the beneficiary on the bond), and the surety bond company (the third party guarantor that the Principal will perform their obligations).
It is important to understand that surety bonds are completely different from insurance policies. With an insurance policy, the insurance company agrees to pay for defined risks of loss in exchange for your premium payment. The insurance company uses its own money to pay claims. A bond is merely a guaranty, backed by the surety’s financial strength, that the broker will pay legitimate freight bills in the agreed-upon manner. The surety is not assuming risk, because it will use the broker’s money to pay those bills. The underwriting on a bond is based upon the broker’s credit history, reputation, and financial strength. That means the broker’s financial statement is crucial; it must show that the broker has the cash to reimburse the surety if there are any claims against the bond.
Here are three ways for small brokers and freight forwarders to prepare for the underwriting requirements of a $75,000 bond: