Protect The Public: Understanding the Types of Surety Bonds
There are many types of surety bonds, but they all share one thing in common — they’re designed to protect the public. To obtain a surety bond as a small business owner, it’s essential to understand what they are and how they work.
Surety bond underwriting is a process that involves analyzing financial information and evaluating a company’s risk. It focuses on three main factors: character, capacity, and capital.
Contract Surety Bonds
Surety bonds guarantee that a principal will meet the terms and conditions of a contract. They help protect obligees and consumers, often governments and private companies, from fraud and malpractice.
The type of commercial surety bonds you need depends on the circumstances and requirements of your industry. Working with a licensed business professional with specialized knowledge of surety products and programs is always best.
Construction contractors use contract surety bonds to reassure customers that they will complete a project according to their specifications. These include bid, performance and payment bonds.
These bonds can also relieve a private project owner from the risk of liens filed by unpaid subcontractors and suppliers. They also protect taxpayer dollars on public projects. These bonds are a necessary part of the construction industry and can make it easier to secure financing. They are not required by all government contracts but are usually compulsory for federal contracts exceeding $100,000. Moreover, many lenders require a surety bond before extending credit on construction projects.
License & Permit Bonds
Before a business can be granted a license by a government agency, license and permit bonds, a particular kind of surety bond, are needed. These bonds protect consumers and ensure the company will adhere to all governmental laws and regulations.
These bonds provide monetary restitution to any consumer harmed by a bonded business’s unlawful activities. This can include fraud and misrepresentation of damages caused by a bonded professional’s negligence.
This kind of surety bond is often required before a business can be licensed in specific industries, such as construction. It also protects government agencies from financial losses from a bonded business’s unlicensed practices.
These bonds can also be used as indemnity guarantees to ensure that a business will repair any damage to public property during its operations, such as sidewalks or streets. There are various license and permit bonds, each specific to a particular industry or profession.
Performance Surety Bonds
When an independent contractor does not complete a project as specified in the contract, a performance bond can help protect the owner from losses. Construction companies and developers often require these bonds as part of the bid process for a new project, ensuring that they can compete against contractors with a track record of quality work.
The cost of a performance bond will depend on the size of the bond being requested, the applicant’s creditworthiness and financial strength, and the contract’s duration. Rates can vary from 1% to 1.5% of the total bond amount.
When a claim is made against a bond, the surety will work with the obligee to assess the damage done and determine how much it will cost to repair or replace the project. If the claims process is successful, the project owner will be reimbursed, and a new contractor can begin working on the project. This can make construction projects more affordable and profitable for everyone involved.
The obligee (the person or entity requesting the bond), the principal (the party carrying out the obligation), and the surety are the three parties to a surety bond.
Civil Court bonds are written to ensure the legal compliance of parties to specified contracts, agreements or industry standards. They are required by numerous state, local and city bodies.
Fiduciary bonds ensure that people appointed to manage another’s financial and property affairs will do so responsibly. Examples of fiduciary bonds include estate executor, trustee, administrator, and guardianship.
The kind, size, and credit risk of an applicant determine the price of a surety bond. Companies specializing in this area can better underwrite the risk, which can result in lower premiums.