The principles of suretyship and of surety are not new to the world. While many may not even know what a surety bond is, there is a very deep and rich history of surety and suretyship. The ideals of suretyship are widely traveled and have spread to more corners of the earth than many of us will ever go. This post will discuss the history of surety and suretyship by first talking about the first signs of suretyship, the first surety companies, United States legislation regarding surety, and the evolution of surety.
Mesopotamia is known for being an ancient civilization and one of the first notable hubs of learning, writing, and religion. However, a lesser known fact about Mesopotamia is that in about 2750 BCE, it was home to the first known record of contract suretyship. It is safe to say that the practice of suretyship carried on from there with some frequency. When the famous Babylonian King, Hammurabi famously wrote one of the world’s first codes of law, he included principals of suretyship in the code. Hammurabi’s Code was written on giant stones and placed in town centers for all to see, and so that all would know the laws. He ruled the Babylonians from 1792-1750 BCE, but the suretyship he outlined in his Code certainly outlived him. The oldest known surviving written surety contract is a contract of financial guarantee between farmers written in Babylon in 670 BCE. In neighboring Persia and Assyria, there were signs of suretyship as early as 525 BCE ¹.
However, suretyship was not confined simply to ancient Middle Eastern societies. It came to be a very important part of ancient trade, not just between people, but between empires. Rome and Carthage used surety to guarantee goods bought and sold between the two counties in 509 BCE. Roman Empire surety laws circa 150 AD contained principles that are still reflected in modern laws of suretyship. The Romans held the belief about surety that it was rooted in duty, not in compensation, which will certainly change by the time Americans get their hands on suretyship. The Anglo-Saxons in England also engaged in suretyship¹ and they, like the Romans, also held the notion that surety was rooted in duty. However, they uniquely used suretyship as a form of criminal law enforcement. A later Englishmen and playwright, William Shakespeare, even mentions surety in his work. Most notably to some, surety is even mentioned directly in the Bible. It is mentioned in Proverbs 6:1, “My son, if you have become surety for your neighbor,” and talked about through Proverbs 6:5.
Institutions that resemble modern day surety companies do not start appearing until the 18th century. The year 1720 saw the first known attempt to create a surety company. While this attempt was unsuccessful it did succeed in getting the ball rolling for surety companies to come. The first successful surety company was the Guarantee Society of London, founded in 1837 in London, England. England proved to have significantly more success in early years of surety companies than the United States did. It wasn’t until 1853 that a law was passed in New York to make the establishing of a surety firms legal.
The first North American company that matched the kind of company Guarantee Society of London² was in England was Fidelity Insurance Company. Founded in 1865 in New York, Fidelity Insurance Company brought the ideas about suretyship from the Old World to the New World. In the years following the founding of Fidelity Insurance Company, others like it started to pop up in the United States and Canada. Citizens Insurance Company was the first Canadian company, founded in 1868. Citizens Insurance Company did not last though, as in 1881 it was discontinued and merged with Canadian Guarantee Company to assume risks. The surety industry started to boom, and between 1883-1898 nearly 25 new surety companies were founded. By 1884, the first successful U.S. company had emerged that was committed to underwriting. American Surety Company, Inc. in New York paved the way for underwriting companies and drew even more attention to the rising surety industry growing in the U.S.
The history of surety continues in United States legislation. Surety bonds had become so prominent and proved so useful that the United States Congress began requiring them. Congress used them to fix the problem the government was having with private construction firms not completing government contracts for public works projects. In 1894, Congress passed the Heard Act which required corporate surety bonds on all federally funded projects to ensure project completion and decrease the amount of tax payer dollars wasted on unfinished projects. The Heard Act of 1894 was incredibly successful, but was eventually replaced by the Miller Act of 1935. The Miller Act built upon the Heard Act and made more rigid guidelines in regards to the kind of bonds contractors had to obtain for federally funded projects. It required performance bonds on public works projects greater than $100,000 and payment bonds for contracts greater than $25,000. The Miller Act proved to be so effective that many states, counties and municipalities adopted what are known as “Little Millers”. These “Little Millers” adopted the ideas of the Miller Act and made them applicable to their respective public works projects. Because of these laws, it is almost impossible, even today, to do any kind of public works project and not have bid, payment and performance bonds in place.
As more surety companies started to pop up and surety bonds became more widely used, the institution and industry changed. In 1931, construction on the Hoover Dam started. This $49 million dollar project required a $5 million surety bond. That was an unheard of amount for a bond, and for the first time, surety companies pooled their capacity to provide the bond. Because surety companies combined their resources, the contract for the Hoover Dam was secured³. This was the first appearance of a struggle that will appear over and over again, even today. As construction projects grow more advanced, more complex and expensive, surety bonds have had to parallel that growth. Big questions are asked, like can surety bonds cover new design risks? Do underwriters understand these new risks enough to provide reliable bonds?
The answers to these questions are complex and no one really knows the answers. What we do know is that even as the surety industry evolves and changes, underwriters still rely on “the 3 C’s” (character, capacity and capital) while assessing risks. And while these questions may expose a perceived weakness in surety bonds, it is clear to those in the industry that they are not weak. In the 2008 recession, when many major industries faced significant financial hardships and cuts, the surety industry remained strong through the entirety of the recession, even with the lack of government funded public works projects ³.