[citation needed] The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit.
[citation needed] Surety bonds also occur in other situations, for example, to secure the proper performance of fiduciary duties by persons in positions of private or public trust.
Evidence of individual surety bonds exists in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, among the ancient Hebrews, and (later) in England.
Frankpledge, for example, was a system of joint suretyship prevalent in Medieval England which did not rely upon the execution of bonds.
[3] The first corporate surety, the Guarantee Society of London (whose insurance business ultimately merged into Aviva), dates from 1840.
[citation needed] In 1894 the US Congress passed the Heard Act, which required surety bonds on all federally funded projects.
The SFAA is a trade association consisting of companies that collectively write the majority of surety and fidelity bonds in the United States.
The industry remains highly fragmented with over 100 companies directly writing surety bonds with new market entrants entering or reentering on a fairly common basis.
[citation needed] In 2008, the New York Times wrote "posting bail for people accused of crimes in exchange for a fee, is all but unknown in the rest of the world".
However, the surety's liability was joint and primary with the principal: the creditor could attempt to collect the debt from either party independently of the other.
Standard form contracts provided by the American Institute of Architects (AIA) and the Associated General Contractors of America (AGC) make bonding optional.
[18] Prices are as a percentage of the penal sum (the maximum that the surety is liable for) ranging from around 1% to 5%, with the most credit-worthy contracts paying the least.
[19] The bond typically includes an indemnity agreement whereby the principal contractor or others agree to indemnify the surety if there is a loss.
[19] In the United States, the Small Business Administration may guaranty surety bonds; in 2013 the eligible contract tripled to $6.5 million.
These bonds function as a guaranty from a Surety to a government and its constituents (obligee) that a company (principal) will comply with an underlying statute, state law, municipal ordinance, or regulation.
Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, law enforcement officers, and credit union volunteers.
[24] The penal bond, although an artifact of historical interest, fell out of use by the early part of the nineteenth century in the United States.
[citation needed] The NMLS ESB initiative began on January 25, 2016, when surety bond companies and providers were able to begin the account creation process.
This initial rollout included agencies in Idaho, Indiana, Iowa, Massachusetts, Texas, Vermont, Washington, Wisconsin, and Wyoming.
On January 23, 2017, another group of twelve state agencies were added to allow ESB capability for certain license types.
The NMLS plans to roll out additional state agencies and update the system with added functionality over time.