Underwriter Definition and Legal Meaning
On this page, you'll find the legal definition and meaning of Underwriter, written in plain English, along with examples of how it is used.
What is Underwriter?
(n) Underwriter is the legal entity who underwrite a future event. In the event the underwritten action is not fulfilled, the underwriter is responsible to make good the proposed transaction.
History and Meaning of Underwriter
In the legal context, an underwriter is a person or entity that agrees to take on a financial risk for a fee. The practice of underwriting dates back to at least the 17th century, when merchants would agree to insure shipments of goods against damage or loss. Today, underwriters are commonly associated with the securities industry. An underwriter may agree to purchase a certain number of securities from a company and then sell them to investors, thereby assuming the risk of not being able to find buyers at the desired price (known as the underwriting spread).
Examples of Underwriter
Here are a few examples of how the term "underwriter" might be used in different contexts:
- ABC Company is planning to issue new bonds to finance a construction project. To ensure that the bonds sell at an attractive interest rate, ABC hires an underwriter to purchase the bonds and then resell them to investors.
- XYZ Corporation has filed paperwork with the Securities and Exchange Commission to go public. The company needs to raise a certain amount of capital and so it enters into an agreement with an underwriter to sell shares of stock to investors at a specified price.
- A wealthy individual wants to insure a valuable piece of art against theft, but the insurance company is hesitant to take on the risk. The individual engages an underwriter to help secure the insurance coverage.
- A city government is planning to issue municipal bonds to fund a new sports stadium. The underwriter hired for this process will help determine the appropriate interest rate and then find buyers for the bonds.
Legal Terms Similar to Underwriter
Here are some other legal terms that are similar in meaning or usage to "underwriter":
- Surety: Often used in the context of bail or other forms of security, a surety is a person or entity who pledges to assume financial responsibility if the defendant fails to appear or meet other obligations under the security agreement.
- Guarantor: Similar to a surety, a guarantor is someone who promises to take on certain financial obligations if the primary debtor is unable to do so.
- Indemnitor: An indemnitor is a person or entity that agrees to hold another party harmless from certain financial risks or losses.
- Insurance company: While not identical to an underwriter, insurance companies perform a similar function by agreeing to assume certain risks in exchange for premiums paid by policyholders.
- Lender: When a financial institution or other entity agrees to lend money to someone, it is essentially taking on the risk that the borrower will not repay the debt. Like an underwriter, a lender may charge fees or interest to compensate for this risk.