How Does a Surety Evaluate a Principal’s Ability to Perform?

Evaluating a principal’s ability to perform an obligation is the final step in the underwriting process. Your ability to get bonds starts, and may end, here.

To get approved for surety bonds you will need to provide your surety company with accurate and timely underwriting updates. And with that, the surety industry has long pinned down the “Three C’s of underwriting” in gauging the principal’s ability to perform. In fact, according to George Robert Wentz’s 1939 publication, entitled Fidelity and Surety Bonding, he coined this “Three Cs” checklist as the “Three Great Essentials.”

These “Three Great Essentials” refer to Character, Capacity, and Capital.


The Three C’s


In every business, nobody wants to deal with a person of bad character. Surety underwriters will assess a person’s honesty and integrity. An unpleasant character is a potential risk that could result in a loss at some point.


This refers to a Principal’s training and expertise that will result in his or her ability to perform contractual duties. For example, in a construction contract, it may be based on past or current work experience, financial responsibility, and possession of proper materials and equipment.


The Principal’s financial standing is crucial. Surety underwriters will conduct exhaustive reviews about a Principal’s ability to finance its operations and quickly respond to financial obligations and claims. A Surety may consider taking collateral or indemnity of third parties to support the Principal’s Capital.


Risk analysis

Sureties may conduct an analysis of a Principal’s financial statements to see if the person or business entity is eligible for the bond. This is based on the level of risk being taken. The higher the risk, the more comprehensive the analysis should be.

Under greater levels of risk, Surety underwriters will require:

  • General Indemnity Agreement
  • Individual or business credit reports and history
  • All current personal financial statements from owners/associate/partners
  • Latest copies of CPA-prepared financial statements (such as bank statements)


Reasons for non-issuance

Once you submitted the necessary requirements to an underwriter, there are several reasons why you may not be issued a bond and cause the Surety to back away:

  • Complicated underwriting scenario. The underwriter may found out that there was a past performance bond claim or you have submitted poor financial information.
  • A sudden change of bonding company because of unpaid obligations, debts, and claims.
  • Unknown risk exposure. Undefined bond terms and conditions would make them impossible to clear out the requirements that an underwriting authority needs.



Surety underwriters may seem to be hard to please. But here are tips on how to get your bond approved:

  • Talk to your bond agent about your situation and bond capacity. Give them an idea of what you have financially and how they can help you secure a surety bond. They will be able to discuss with you in detail what the surety company's expectations are, and what you need to do to accomplish this.
  • In submitting your application and other documents, make your info easy to process and accessible. Make sure to submit them in the right file, such as .docs or .pdfs. Do not send one large .bmp or .jpg picture file if they do not require it.
  • Cooperate and coordinate with your Surety. If a Surety asks for more information (especially with your financial standing) to make the process easier and more helpful, just provide it. Sureties will hold them in the strictest confidence.
  • Submit proper bond forms. Copies of these bond forms can be obtained from the appropriate state agency, regulation department, or project owner (they are what you call the Obligee). If the underwriter requires you to use their own application, then use it. Leave no fields unmarked.

Regardless of what steps you need to take to be approved a bond, remember that underwriters take a substantial amount of time to evaluate all the necessary documents to remain viable. Your bond must be easy to process and approve. Assuming that the underwriting makes sense and that you possess the Three C’s in you, the Surety will immediately issue the bond to you. Make your bond application be the one they want to work on next.

If you are in need of a surety bond, don't hesitate to contact us today!

Check out this Infographic!

"How Does a Surety Evaluate a Principal’s Ability to Perform?"

The Three C’s of Underwriting
Liked this content? Share it!