Surety Bonds

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But first, what is a bond?

A bond is a way to secure a debt through a three-party contract in which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee). As the business owner or contractor, you serve as the principal. The surety is the company who provides a financial guarantee to the obligee that you will fulfill your obligations.

Two Types of Surety Bonds

Contract Surety Bonds

Surety bonds that are written for construction projects are called contract surety bonds. A project owner (the obligee) seeks a contractor (the principal) to fulfill a contract. The contractor, through a surety bond producer, obtains a surety bond from a surety company. If the contractor defaults, the surety company is obligated to find another contractor to complete the contract or compensate the project owner for the financial loss incurred.

There are four types of contract surety bonds:

  1. Bid Bond: Provides financial protection to the owner if a bidder is awarded a contract but fails to sign the contract or provide the required performance and payment bonds.
  2. Performance Bond: Provides an owner with a guarantee that, in the event of a contractor’s default, the surety will complete.
  3. Payment Bond: Ensures that certain subcontractors and suppliers will be paid for labor and materials incorporated into a construction contract.
  4. Warranty Bond (aka: a Maintenance Bond): Guarantees the owner that any workmanship and material defects found in the original construction will be repaired during the warranty period.  

Commercial Surety Bonds

Commercial surety bonds cover a very broad range of surety bonds that guarantee performance by the principal of the obligation described in the bond. They are required of individuals and businesses by the federal, state, and local governments.

Commercial surety bonds can generally be divided into five types of bonds:

  1. License and Permit Bonds: Required by federal, state, or local governments as a condition for obtaining a license or permit for various occupations and professions. License and permit bonds include auto dealer bonds, mortgage broker bonds, contractor license bonds, and surplus lines broker bonds.
  2. Court Bonds (also called judicial bonds): Required of a plaintiff or defendant in judicial proceedings to reserve the rights of the opposing litigant or other interested parties. Court bonds include appeal bonds, supersedeas bonds, attachment bonds, and injunction bonds.
  3. Fiduciary Bond (also called probate bonds): Required of those who administer a trust under court supervision. Typical such bonds are executor and administrator bonds, trustee bonds, guardian bonds, and conservator bonds.
  4. Public Official Bonds: Required by statute for certain holders of public office, to protect the public from malfeasance by an official or from an official’s failure to faithfully perform duties. Public official bonds included county clerk bonds, tax collector bonds, notary bonds, and treasurer bonds.
  5. Miscellaneous Bonds: These are commercial surety bonds that do not fit into any of the types above. Included are a wide variety of bonds, such as warehouse bonds, title bonds, utility bonds, and fuel tax bonds. 

Common Bond Requests

While there is a plethora of bonds to fit your specific need, there are a couple kinds of bonds that we encounter more frequently.

Payment and Performance Bonds

These bonds are usually issued once a contractor has successfully won a contract bid. They are meant to protect the owner from the contractor defaulting on their obligations. Payment bonds are meant to guarantee to the subcontractors, suppliers and laborers that are hired by the contractor, that they will receive payment for services and materials.

A payment bond and performance bond are usually issued together. The dollar amount of the contract awarded, financial health of the applicant and project history and experience can all be examined to determine the premium rate on the bond.

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Contractor License Bonds

Contractor License Bonds are legally enforceable contracts that bind together three separate parties:

  1. The construction professional buying the contractor license bond (considered the principal).
  2. The entity requiring the contractor to be bonded (acts as the obligee).
  3. The company issuing the bond and guaranteeing the contractor’s obligation (the surety).

If the contractor fails to fulfill the bond’s terms, then the oblige can make a claim on the bond to gain compensation for any damages. If this happens, the contractor is expected to reimburse the surety for any money it pays when settling the claim.

Start Your Contractor License Bond Quote Here

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