What is a Surety Bond?
A surety bond is a three-sided contractual agreement guaranteeing that a business or individual will fulfill their obligations under a contract and in accordance with business regulations. The three parties involved in the surety bond agreement are:
- The obligee (the party requesting a surety bond)
- The principal (the party obtaining the bond)
- The obligor (the surety company backing your bond financially)
Who Needs a Surety Bond?
Anyone legally required to purchase a surety bond due to your job type
or where you work. Many government entities mandate the use of surety
bonds for certain industries as a preventative protective measure for
consumer interests. Oftentimes bonds are required before business owners
can get a license to operate in a certain city or state.
How Do Surety Bonds Work?
When you enter a License Bond or Permit Bond, you are promising to perform your work and adhere to state or town regulations. The party requesting the bond is paying you to perform the work. Should you fail to perform the work, that's when the surety company steps in and pays the obligee if you fail to perform as required by the contract.
A License Bond /Permit Bond differs from most small business insurance contracts because it involves three parties instead of just two — the insurer and the insured. For builders and contractors, the primary difference between a bond and a typical insurance contract is that the surety's duty is to the obligee, rather than you, even when you pay for the bond.
To get bonded, only a small percentage of the bond amount, which is called a bond premium, is required. This percentage is different for every applicant and it is based on different factors, such as the type of bond you need, your credit score, financial statements and more.
What Are The Benefits of Being Bonded?
Being bonded gives issuers the ability to leverage business growth. With the increased stature of having the insurer’s credit rating, a business can feel safer in taking risks to improve and grow the business. This is especially true in the construction and financial industries.
Contractors: What You Need to Know about License Bonds / Permit Bonds
For construction and contracting businesses, License and Permit Bonds are required by certain federal, state, or municipal governments as prerequisites to receive a license or permit to engage in certain business activities. These bonds function as a guarantee from a surety (usually an insurance company) to a government and its constituents that your business will comply with an underlying state and local laws relating to your industry, such as building codes and safety regulations.
For example, if your business won a bid to build the framework for a new gym, usually you would buy the surety bond that would pay the gym if you failed to complete your end of the contract or your performance was not up to code. The gym could then use the money to pay another builder or contractor to do the job. Meanwhile, the insurance company paying the money would hold you responsible for reimbursement.
Since surety claims are not caused by accidents, but rather a failure to complete a project according to contract terms, ultimately the surety has a responsibility to the obligee to "prequalify" the contractor or builder for the work. To guarantee your performance and integrity to your client, the surety must carefully evaluate your bond history and creditworthiness.
During your bond application process, some questions you encounter may include…
- Do you have any other surety bonds in force with any other surety company?
- Has another surety company declined to write this or any previous bond?
- Have you ever had a bond involuntarily terminated or cancelled?
- Has there ever been a claim or legal action against any bond executed on your behalf?
- Do you or any of your companies have any pending lawsuits, unsatisfied judgments, or liens?
- Have you or any of your companies declared bankruptcy or become insolvent?
- Have you or any of your companies been the subject of any legal or administrative proceedings resulting in disciplinary action?
Still have questions about Surety Bonds? Contact a Builders’ Choice agent today!