The school year begins, but cinderblocks sit where a new classroom should be. Ground is broken for a new church, but after it’s framed, work comes to a standstill. The surety bonds written by individual sureties on the projects should have covered their completion costs, but they didn’t. Then there are the contractors whose bids were rejected because they submitted unacceptable  individual surety bonds, but were unable to get back the premiums they paid for the bonds that were never used. Do these scenarios sound familiar?

Even for the most prepared and experienced contractors, there’s always the possibility that something could go terribly wrong on a construction project. Surety bonds are designed to respond to these unexpected obstacles. Almost all surety bonds are issued by insurance companies licensed to write these guarantees. The federal government allows contractors to provide bonds backed by certain assets in lieu of corporate surety bonds, and those bonds are written by individual sureties.

While bonds written by individual sureties may offer contractors an alternative to corporate surety providers, these bonds also may pose a risk for the contractor and for the obligee. Recent media reports have detailed the potential risks of obtaining bonds from individual surety providers, which in those cases were not as financially solid as they purported to be.

Vetting Individual Sureties
Individual sureties issuing surety bonds in the United States are required to be licensed pursuant to applicable state laws and regulations, unless issuing bonds to the federal government pursuant to the Federal Acquisition Regulations (FAR). The FAR stipulates that individual sureties meet certain requirements, but the requirements are not as rigorous as they could be, and enforcement often is challenging due to limited federal resources to properly vet individual sureties and the assets that are purported to back their bonds.

Contractors can review financial ratings provided by independent rating agencies to help them determine a corporate surety’s ability to respond to a contractor default. But, individual sureties aren’t rated by any rating agencies because they are individuals, and the assets they claim to pledge to back the bonds are not rated either.  Therefore, it is hard to know if they have sufficient assets to respond when needed.

Because a surety bond is intended to provide an obligee with a certain level of assurance that the bonded obligation will be performed in accordance with its terms, it is critical for the assets to support that guarantee. A corporate surety bond is backed by the assets of a corporate surety insurer. However, when a firm buys an individual surety bond, it is buying a bond backed by that individual’s alleged property or assets. Unfortunately, it’s often not until a default occurs in connection with the underlying bonded contract that the assets supporting the bond may be found to be inadequate. The risk generally transpires because the individual surety may put up collateral that is overvalued, illiquid, speculative or pledged to multiple projects so it can’t be used by the surety to perform its obligations.

Using an individual surety may pose more risks than many contractors or obligees are willing to take on. Ensuring that the surety has the qualifications and financial strength to secure a project takes some research; following are some key characteristics to look for.

Experience and Infrastructure

The successful completion of a construction project requires experience and expertise in business, finance, construction trends and more. Most corporate sureties have underwriting and claim departments in place to help prequalify and evaluate contractors’ ability to complete the job, identify and head off issues, and respond quickly if they occur. Individual sureties generally don’t have the same level of experience and infrastructure in place.

Because even the most experienced construction companies can run into unforeseen challenges, it’s important that claims personnel are able to work closely with the contractor and obligee in an effort to address any issues that arise. Accordingly, contractors should ask if the surety has experienced underwriting and claim departments.

Strong Financial Backing
A contractor working with a corporate surety provider should look for one that has received high financial ratings from independent rating agencies. Even if a contractor determines that an individual surety bond is acceptable, it should verify that the obligee will accept that bond and also verify the assets backing the bond.

Additionally, the contractor should confirm that the purported assets are actually owned by the individual surety, are accurately valued, easily liquidated, and are not otherwise pledged or encumbered. It’s also prudent to ensure that the terms and conditions of the bond do not provide illusory coverage.

All business relationships involve risks, and individual sureties are no exception. If a firm is considering obtaining an individual surety bond, take a close look at the applicable laws and regulations to ensure that the individual surety is entitled to provide this service. Then, carefully review the quality of the individual’s operations and assets. Doing research now could prevent unwelcome—and costly—surprises later. 

Cathy Donahue is vice president and director of Chubb Surety. For more information, email