Insurance Companies That Do Bonds

A fidelity bond protects businesses against losses caused by employee theft, fraud, or embezzlement. If an employee steals company funds or commits dishonest acts, the bond can compensate the business for financial losses, and in service businesses, it can also help protect customers from dishonest acts.

A surety bond, on the other hand, guarantees that a contractor or business will faithfully perform contractual or legal obligations. If the principal fails to complete the work or violates the agreement, the obligee can file a claim against the bond for compensation. Unlike traditional insurance, a surety bond is a three-party arrangement in which each party has a distinct role.

The three most common categories of surety bonds are used by major players such as contractors, regulated businesses, and government-facing applicants:

• Contract bonds – Used in construction and government projects to guarantee project completion according to contract terms.
• Commercial bonds – Required for licensing, permits, or regulatory compliance for certain businesses, often before a company can legally operate.
• Court bonds – Used in legal proceedings to guarantee financial or fiduciary responsibilities.

In these cases, the principal purchases the bond to satisfy the obligee's requirement.

Contract surety bonds are especially common for contractors bidding on public or large commercial projects.

Surety bonds help demonstrate that a contractor is financially responsible and has the ability to complete work according to agreed standards. Many project owners and government agencies require contractors to obtain bonds before awarding contracts, and some may require them before contractors can legally operate on certain public projects or under licensing rules.

These bonds protect clients from financial losses caused by contractor default, poor workmanship, abandonment of the project, failure to meet contractual obligations, and added project risk for owners and customers.

If the principal (the contractor) does not fulfill the contract terms, the obligee (the project owner or client), as the second party, can file a claim against the surety bond. The surety company may compensate the obligee for covered losses or arrange for the work to be completed.

However, unlike traditional insurance, the principal is generally required to reimburse the surety company for any claim payments made on their behalf, depending on the bond terms and the obligations of the parties involved.

Surety bonds are typically purchased through insurance companies that do bonds, licensed surety bond brokers, managing general agents, or specialized surety providers. Many large commercial property and casualty insurance companies also offer bond services as part of their commercial insurance portfolios, and underwriting may review cash position and credit depending on the bond type and exposure.

Municipal bond insurance in the United States began in 1971 with the formation of the American Municipal Bond Assurance Corp., later known as Ambac. The industry grew rapidly, and by the late 1990s and early 2000s, roughly half of U.S. municipal bonds carried insurance, adding security for investors in municipal finance.

One major event that increased demand for bond insurance was the 1983 default of the Washington Public Power Supply System on $2.25 billion of revenue bonds, where insured bondholders still received full payment from Ambac. That default highlighted the value of bond insurance because insured holders were paid in full, which increased demand among government agencies and the construction industry, two of the major players that rely on bonding to reduce risk.

The 2008 financial crisis significantly impacted the industry, as structured-finance exposure, asset deterioration, and interest-rate-driven mortgage stress increased risk for insurers, causing downgrades and reducing the number of active insurers. Those downgrades also hurt equity, limited access to finance, and reshaped the position of insurers in the market. Since then, Assured Guaranty has remained the only bond insurer to continuously write insurance from the pre-crisis period to today after acquiring several competitors. Some bond insurers and related firms also faced listing pressure and added scrutiny tied to the New York Stock Exchange.