Surety & Bonding

A surety bond is a contract between three parties—the principal (you), the surety (bonding company) and the obligee (the entity requiring the bond)—in which the surety financially guarantees to an obligee to pay one party a certain amount if the second party fails to meet their obligations, such as fulfilling terms of their contract. This bond will protect against losses resulting from failing to meet that obligation.  A surety bond is a promise or guarantee.

Contract Surety Bonds

Contract Surety Bonds are most commonly used in the construction industry to ensure projects are completed according to the contract. The terms, “contract bond” and “construction bond” are often used interchangeably. If the contracted party meet its obligation according to the bond’s terms, the project developer can make a claim on the bond to recover financial losses.

Surety bonds are almost always required before work can begin on public projects. Private project developers can also require contractors to file certain types of surety insurance before work can begin on their projects.

Contract surety bonds include:

Bid bonds: This type of contract bond guarantees that if you bid on a particular project, in good faith, and are awarded the contract, you will honor the terms of your bid and sign all contracts related to the project.

Performance bonds: guarantees adherence to all terms of the building contract, including staying on budget, timeline, and job completion.

Payment bonds: guarantee that the contractor will pay certain subcontractors, laborers and material suppliers associated with the project.

Maintenance bonds: guarantee against defective workmanship or materials for a specified period.

Subdivision bonds: Also called an Improvement Bond, this is often required by a municipality or public agency before entering into a contract for a new development. This bond guarantees that the principal will finance and construct certain improvements such as streets, sidewalks, curbs, gutters, sewers and drainage systems.

Commercial Surety Bonds

Commercial Surety Bond is often required by the government. Typically, professionals who are applying for an industry-specific business license will need a commercial surety bond before a license is issued. For this reason, the annual bond premium will often vary, depending on the industry and the type of license being bonded.

The size of the bonded amount is largely dependent on the following factors:

  • Number of physical locations or projects
  • Total number of employees
  • Annual sales transactions
  • The specific license being bonded

Commercial surety bonds include:

License and permit bonds: A license and permit bond is required by a government organization when a professional applies for a license like a contractor’s license. These surety bonds protect public interests against failures to follow the codes and regulations of a professional license. The most common professions that require a license and permit bond include contractors, electricians, plumbers, and non-resident professionals.

Judicial Surety bond is used to protect a person or company against potential losses during a court proceeding. Court surety bonds are most commonly voluntarily used by plaintiffs and defendants in court. However, they can also be required by law, such as with an administrator of a person’s estate.

Court surety bonds can be broken out into two broad categories:

  • Defendant bond – Essentially blocks a plaintiff’s attempt to pursue the satisfaction of a claim. For example, bail bonds and appeal bonds are both types of defendant surety bonds.
  • Plaintiff bond – Often a requirement of plaintiffs in order to ensure that the defendant is financially protected should the plaintiff lose the court case. Plaintiff bonds hold the plaintiff financially liable for any damages that a defendant suffers due to a court proceeding.

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