If your commercial book includes a sizeable portion of contractors, you’re probably accustomed to fielding some misinformed questions about surety.

According to David Hombach, chief underwriting officer, Construction Services, Bond & Specialty Insurance at Travelers, “the single biggest descriptor of the difference” between surety and other types of insurance is its nature as a three-party arrangement between “the owner who is requiring the bond from the contractor, the contractor who is delivering the project to the owner, and the surety who is guaranteeing that the project will get done.”

With standard insurance, by contrast, “there are just two parties: insured and insurer,” Hombach says.

Although surety “is included within the insurance industry,” says Rita Jorgenson, vice president at Goldleaf Surety, “it is different than insurance. It’s not the same as buying car insurance and paying a premium for it so that if something happens, the insurer pays to have things fixed.”

Surety bonds are credit instruments—every dollar of risk on a bond needs to be personally guaranteed, much like a bank loan for any small business. The contractor provides indemnification to the surety, agreeing to be responsible for reimbursement for claims and associated attorney’s fees.

What many contractors don’t understand is that a surety bond doesn’t protect the contractor. It protects the project owner, also known as the obligee, from loss by the surety if the contractor fails to fulfill their obligations.

“That’s where a lot of contractors are confused, or at least ones that are starting out with surety. In most cases, the obligee is a government entity and the bond is in place to protect the city, state, government and its citizens,” Jorgenson explains.

Because of that, the surety bond should usually be considered a cost of the project. “Some obligees would probably argue with me on that, but if they’re the ones wanting that protection, that cost should fall on them,” Jorgenson says. “If the contractor is paying for it, they shouldn’t be.”

This confusion often leads to contractors and agents “getting hung up on rate,” Jorgenson says. “But rate depends on their credit, the industry they’re operating in and the type of bond they need—all these different factors go into it. They need to understand what’s driving that rate.”

That’s especially important in a soft market like the one that’s marked the surety business for several years now. “There’s a lot of competition,” Jorgenson points out. “There are a lot of agents out there working with different sureties, and everybody’s trying to win that customer. That means the industry is seeing a lot of capacity and competitive rates.”

Although Jorgenson expects the market to start hardening again around 2020, “right now, it’s definitely the contractor’s advantage,” she says. “If and when that recession does happen, the key to weathering that change is being educated and prepared in order to ensure that their bonding capacity and rates are secure.”

That’s where you come in, Jorgenson says: “You need to offer more to your contractors than just capacity and rate. Of course you want to provide good rates and as much capacity as they qualify for, but you also need to educate them on how to keep or improve those things. When you do that, you’re creating relationships that will hopefully last a long time.”

For three ways to strengthen your relationships with your surety clients, keep an eye on IAmagazine.com and upcoming editions of the Markets Pulse e-newsletter.

Jacquelyn Connelly is IA senior editor.