A Short History of Surety Bonds

The history of surety bonds is long, but their use in the USA for commercial purposes really took off in the 19th century. Here are some key milestones:

• Early references: Concepts of suretyship can be traced back to ancient civilizations, but in the USA, written legal codes addressing suretyship emerged around 1800.
• Rise of corporate surety: The first successful corporate surety company, the Guarantee Society of London, was founded in England in 1840. The USA saw its first attempt at a similar company with the Fidelity Insurance Company in 1865, though it didn’t last long.
• Federal government and surety bonds: Recognizing the need to protect taxpayer dollars, the US Congress passed the Heard Act in 1894. This act mandated the use of surety bonds on all federally funded construction projects. This legislation played a pivotal role in establishing surety bonds as a standard practice in government contracting.

History of Surety Bonds : The Miller Act of 1935:

• A landmark piece of legislation, the Miller Act significantly expanded the use of surety bonds in construction. It required prime contractors on most federal building projects exceeding $100,000 to obtain two types of surety bonds:
  • Performance bond: This guarantees the project’s completion according to the agreed-upon plans and specifications.
  • Payment bond: This protects subcontractors and suppliers by ensuring they are paid for their labor and materials used in the project.

The Miller Act’s impact went beyond federal projects. Many states followed suit with “Little Miller Acts” implementing similar requirements for state-funded construction projects. This legislation not only protected the government but also ensured fair treatment for subcontractors and suppliers in the construction industry.

• Standardization and growth: The early 20th century saw a period of growth and standardization in the surety bond industry. The first legal case involving a surety bond reached the US Supreme Court in 1898 (American Surety Co. v. Pauly). The National Association of Surety Bond Producers (NASBP) was established in 1942, further solidifying the industry.
• Modern Surety Bonds: Today, surety bonds are used in a wide range of industries beyond construction. They play a crucial role in protecting consumers and ensuring businesses comply with regulations.

Key takeaway: While the concept of suretyship is ancient, the use of formal surety bonds in the USA boomed in the late 19th and early 20th centuries. The Heard Act and the Miller Act were instrumental in establishing surety bonds as a vital risk management tool, particularly in government contracting. Today, they remain a cornerstone of financial security in various sectors.

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About the Author

 

John Page started his career in the surety bond industry in 1987.
He is a former Vice President of a top 10, national surety company and the founder and former president of Surety1.