Collateral:

Collateral in regard to surety bonds is used as a tool by the surety to mitigate risk. Collateral is provided by the principal in a surety bond agreement. A surety may require a principal to put up collateral in order to gain approval for the requested surety bond. Typically this is required when a surety assesses that the risk of bonding the principal is too high without some form of collateral in place.

Collateral can typically be provided in the following forms:

• ILOC (Irrevocable Letter of Credit) from a bank acceptable to the surety.
• Cashier's Check.
• Money Order.
• Wire Transfer.
• In rare cases, residential real estate.

Collateral mitigates the risk to a surety by providing the surety funds on hand to use toward settling any claims that may be made on the bond. When collateral is required to obtain a surety bond, a collateral agreement is usually provided that will indicate how the collateral can be used by the surety. Generally speaking, collateral is accessed by the surety to cover losses incurred by the surety due to instances of valid claims on the bond.

Collateral may be returned after the surety's liability to the bond has expired. A surety will typically hold collateral provided on a bond for a set period past the bond expiration or cancellation. This is done because the period for which claims can be made on the bond may also extend beyond the bond expiration date. Depending on the type of bond and the state where the bond was issued, the surety's liability on the bond can extend anywhere from a few months to up to three years past the expiration or cancellation of the bond. During this period, the potential for a claim to be made on the bond still exists. When collateral is required, the surety will typically include a document displaying the collateral release policy for that bond. After the collateral hold period has passed, the collateral can be released as long as the surety can verify that no further risk of a claim on the bond exists.