Continuing our series on how the COVID-19 crisis is affecting certain bond types, Suretypedia examines how Utility Deposit bond form language and grace periods granted by utilities may increase Surety carrier liability.
Suretypedia’s Guide to Obligees
Author: Suretypedia Team
Posted On: 11-19-2019
The surety bond industry is one of the most opaque, misunderstood niche lines in the insurance industry with its unique tri-party structure and arcane terminology. No bond term is more confusing to the non-surety expert than “Obligee”, the driving force behind the need for a surety bond in all cases. Even surety professionals get frustrated as their spell checkers auto-correct to “oblige”, but fortunately the words are related as it’s all about an “obligation.” An obligor is obligated to an obligee under a surety bond in the same way that a lessee is obligated to a lessor under a lease (only in surety would they flip the suffixes!!). This article seeks to provide an understanding of the Obligee’s role in bonding, claims, and requirements for Surety Companies.
What is the Definition of Obligee?
In the context of Surety, the obligee is the entity that requires and is protected by a Surety bond, while the obligor, generally referred to as the “principal,” is the party obligated to follow the terms of the bond, usually defined by of statutes referenced in the bond form. If the principal fails to meet their obligations, the surety company provides financial protection to the obligee. The obligee unilaterally drafts the surety bond agreement or “Bond Form,” most often on a take it or leave it basis. This requirement is unique to surety, as most contracts are negotiated by all parties involved. The obligee to a surety bond is generally a federal, state or municipal government agency. In some cases, private companies can also require bonds of businesses who contract with them.
Below are examples of different types of Obligees:
- Centers for Medicaid Services
- United States Department of Agriculture (USDA)
- California State Contractors Licensing Board
- Maryland Home Improvement Commission
- City of Los Angeles, CA
- City of El Paso, TX
- Private Companies
- Pacific Gas and Electric (PG&E)
- Orlando International Airport
What is the Obligee’s role in bonding?
The obligee serves as the creator and beneficiary of the Surety Bond. Obligees draft the bond form and hold the surety bond company accountable for the financial penalty of the bond should the principal(s) not fulfill their obligation(s) listed in the bond form, who in turn hold the principal accountable for reimbursement.
What is the Obligee’s role in claims?
The Obligee’s role in the claims process is to notify the surety company when they become aware of a potential claim, whether from a third party claimant or as a result of a violation with the obligee. Obligees and other claimants are able to submit claim evidence to the Surety by phone, email or, more traditionally, by letter. Dependent on the language in the bond form, the Surety may be required to provide a response or payment to the claim within a certain number of business days (For more information on Demand Clauses take a look at our Guide to Bond Forms).
What Does the Obligee Require from the Surety?
The obligations of the Surety are detailed in the Bond Form which may include instructions on how quickly the Surety needs to pay a claim, how much the Surety must pay (aka the “Limit”), and how soon the Surety can cancel a bond. In all cases, the Surety must be licensed as an insurance carrier to do business in the state where the bond is issued. Some obligees require specific financial ratings, or other criteria, from Sureties they accept bonds from to evaluate if the Surety has the necessary financial capacity to pay claims. Two measures used to determine the qualifications of a carrier are an AM Best rating and the Circular 570 listing. AM Best is the oldest and most widely used financial rating platform for insurance companies and has provided ratings on roughly 3,500 carriers worldwide. AM Best categorizes a carrier’s financial strength rating based on its ability to meet its ongoing insurance policy and contract obligations. The Circular 570, aka the Treasury Listing or “T-List”, is a list of Surety Companies who are registered with the U.S. Department of Treasury. Companies who wish to directly write federally required bonds, reinsure federal bonds, or be recognized as an Admitted Reinsurer for companies who write or reinsure federal bonds, must apply for this program.