• Main Page
• life
• Health
• Auto
• Home
• Commercial
• Bonds
• Travel
• Auto Warranty
• Motor Club

Need help?
We have readily available licensed insurance agents to attend to you.

CALL 1-800-777-5907

Be informed with what's new in the insurance world.

Surety Bonds

A guarantee of the faithful performance of a construction contract and usually the payment of all labor and material bills related to it. In those situations where two bonds are required - one to cover performance and the other to cover payment of labor and materials - the former is known as a performance bond, and the latter as a payment bond.

TYPES OF SURETY BONDS

There are two types of bonds of primary interest to our customers: (1) Contract Bonds (bid, performance, labor & material payment bonds); (2)License or permit bonds, which are required for many occupations, including contractors.

Contract Bonds

There are three types of contract bonds: bid bonds, performance bonds and payment bonds. A bid bond is an obligation undertaken by a bidder promising that the bidder will, if awarded the contract, enter into the contract and furnish the prescribed performance and payment bond's) within a specified period of time. A performance and/or payment bond is specifically intended to cover a particular contract. A performance bond covers the contractor’s actual performance of the contract. It guarantees payment – up to the amount of the bond– of such things as the cost of completion or cost to correct deficiencies which are the responsibility of the contractor. A payment bond is intended to pay laborers, suppliers and other contract-related costs which the contractor owes to third parties. The benefit to a private (as opposed to public, i.e. governmental) Obliges is that it provides a source of funds for those who might otherwise be able to enforce a lien against an owner’s property.

Performance and payment bonds may be two separate documents, each with its own penal sum, or they may be combined in one document with a single penal sum. The penal sum is usually the contract amount at the time the bond is executed.

Some things to keep in mind:

For Contractors:

• The Obliges is generally expected to pay the premium for performance and payment bonds. Thus, contractors must include the cost of the bond in their bids. The premium is an amount in most cases ranging anywhere from 1% to 3% of the contract price.

For Owners:

• Bond requirements must be included in the original bid and contract documents. One cannot expect a contractor to provide a performance or payment bond unless it is made a requirement of the contract. In fact, one may be in breach of contract by refusing to let the contractor proceed without a bond when none was required in the contract documents. Decide ahead of time what sort of protection without is wanted from a bond. Specify the type of bond's) in the contract, and require a bond in a form acceptable to the person drafting the contract.
• The original must be delivered to the Obliges before protection is effective. The Obliges should read the bond carefully to be sure it does what the Obliges wants and note carefully any notice requirements, time limits, and special conditions. If an Obliges does not comply with the bond’s terms, its protection may be lost.
• It may be impractical to require a bond for a small contract, since the contractor may not be able to find a Surety willing to write a small bond. Similarly, if a contract is imprecise or legally deficient, it may not be bondable. In addition, a Surety is often reluctant to bond contracts where the work has already begun. If for any reason a contractor cannot produce a required bond, one who has required the bond should consult an attorney before attempting to use this failure as a reason to terminate the contract.

 

2. License and Permit Bonds

License and permit bonds are those required by state law, municipal ordinance, or by regulation and in some instances by the federal government or its agencies. To be licensed, a contractor must frequently have a bond and, in many states, a certain amount of insurance coverage. The bond may either be one written by a Surety company or, in some states, a cash deposit made with the State. In practice, the terms "license" and "permit" are used interchangeably.

The purpose of a license or permit bond is usually to safeguard the public health, welfare, morals, or assure the public’s safety. These bonds are usually for the benefit of laborers, suppliers, and taxing authorities, as well as most persons having contracts with the contractor. The amount of the bond (the "penal sum") is the total limit of the Surety’s liability to all claimants combined. Thus, where a contractor has several claims lodged against its bond, the protection for any individual may be much less than the full amount of the bond.

A license or permit bond may thus provide someone with only minimal protection. Before entering into a construction contract it is wise for an owner to call the licensing agency to be sure that the contractor has the necessary bonds and adequate insurance coverage, and to determine whether there are any claims pending against the bond. Insurance coverage should be confirmed through requirement of a current Certificate of Insurance.