In Surety underwriting, there are many factors which go into the determination whether a Surety can tell an Obligee (via a bond) “Yes, this Principal/Contractor has the ability to complete your contract”. A number of these factors fall under what the Surety industry calls “The Three C’s”; Character, Capacity, and Capital.

All three of these are important to the underwriting process. The principal needs to exhibit the Character, Capacity, and Capital to qualify for surety credit. While the principal may be stronger in one area than another, depending on the specific obligation, they must possess all three to some extent.


1. Character: refers to the moral qualities unique to an individual or entity

We believe that while all three Cs are important, Character can sometimes be the most important. If the principal falls a little short in one of the other Cs, character can often move the needle from declined to approved. Strong moral Character is an important trait in all areas of business, not just for the surety program. The best way for the surety to underwrite character is by having a relationship with the principal. For larger, well established accounts, we have regular meetings with the contractor and surety underwriter. Honesty and completeness of the application and financial information is also a good indication of Character.

Why It Matters: Sureties must trust the principal to fulfill their obligations under the bond. Assessing the character involves examining the principal’s history regarding honesty, integrity, and adherence to previous contracts and agreements.

How Character is Measured: This may involve checking references, examining the history of completed projects, and potentially reviewing any legal or financial blemishes like bankruptcies or lawsuits.

2. Capacity: is the capability, job history, or available workload

Some examples of underwriting Capacity include, confirming that the principal has experience in the area of construction they are seeking surety credit. For example, a contractor skilled in plumbing, would need to explain a possible electrical job they would like to perform. Or a contractor with experience in California, looking to bid a job in Alaska having never been to Alaska. An applicant whose largest completed job is $500,000, asking for a $5 million contract, will face questions. None of these situations mean that the contractor is not capable of doing the job, however the surety will ask more questions and need additional underwriting. The strength of the other Cs will also help the underwriting.

Why It Matters: The surety needs assurance that the principal has the necessary expertise, manpower, machinery, and management ability to successfully execute and complete the project or contractual obligation.

How Capacity is Measured: This might encompass reviewing financial statements, evaluating technical skills and experience, and assessing the management team’s qualifications and track record.

3. Capital: refers to the demonstrable financial position of the applicant.

Examples of Capital include reviewing financial statements for adequate working capital, profitability, and net worth. The surety will typically need to underwrite three years company financial statements as well as any affiliated companies’ financial statements and personal financial statement. The surety will run credit and make sure the principal is paying their subcontractors, suppliers, and labor.

Why It Matters: Adequate capital ensures that the principal has the financial stability and strength to navigate through unexpected challenges and to fulfill their obligations under both the bond and the contract.

How Capital is Measured: This generally involves a thorough review of the principal’s financial health, including assets, liabilities, credit history, and overall financial position.

Navigating through the three C’s, sureties meticulously scrutinize and evaluate the principal’s trustworthiness, ability to perform, and financial health before issuing a surety bond. This ensures that the principal is a viable candidate who is likely to adhere to the obligations, thus safeguarding the interests of the obligee (the party protected by the bond) and minimizing risks for the surety.

In any surety bond transaction, understanding and fulfilling the requirements encapsulated in the three C’s can streamline the path towards obtaining the desired bond, ensuring a solid foundation for a successful and cooperative partnership amongst all involved parties. This also reinforces the stability and reliability of the principal in the eyes of the obligee, fostering a healthy and trustworthy contractual environment.


As always, if you have any questions, we are here to help. Please contact us with any questions, concerns, or surety needs.

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