Surety Bonds

A surety bond is an agreement created to protect the obligee against breach of contract by the principal. The bond gives a guarantee that the principal will perform their obligation as per the agreement.

In the construction industry, a surety bond is a three-party contract between a contractor, project owner (often a municipality) and a surety company. The bond is an assurance from the principal that a construction project will be completed per the terms of the contract and that all labor and materials will be paid for. In the principal’s failure, the obligee may file a claim on the bond resulting in a loss from the surety; however, the loss can be made whole by the surety recouping their losses from the principal. The surety company may hire another contractor to complete the project, or it can reimburse the project owner.

In the case of public projects, there are generally four surety bonds that a contractor may need:
1) Bid bond
2) Maintenance bond
3) Performance bond
4) Payment bond

The bid is submitted with your proposal. It assures the owner of the project that you will enter into a contract and provide the owner with performance and payment bonds if you are the lowest bidder & awarded the job.

The performance bond shall provide a guarantee that the contractor will perform the job
according to the terms within the contract. As a general or prime contractor, the payment bond

guarantees that you will pay any subcontractors and suppliers you’ve contracted with for this particular project.

It should also be noted that this three-party arrangement may also apply to a sub-contractor /general contractor relationship, where the sub-contract provides the GC with bid/performance/payment bonds if required, and the guarantee is the same as above.

Construction is a volatile business, and relationships provide the owner with options (see above)if things go wrong on a job. Also, by providing a surety bond, you tell the owner that a surety company has reviewed your construction business fundamentals and has decided that you are qualified to offer a specific job. Bonding is a credit-based product, meaning the surety company will examine the financial underpinnings of your company.

What Is a Court Bond?

“Court bond” is an umbrella term for the different types of surety bonds required in certain court proceedings. Broadly defined, court bonds act as security for payments or obligations. Many types of surety bonds are usually referred to as court bonds, owing to their connection with court cases. Common examples of probate court bonds are administrator, executor, guardianship in which an individual has been placed in charge of a person’s assets or estate. In other words, this type of court bond ensures that a party fulfills its court-ordered duty to act, for example, ethically and legally as a court-appointed guardian.

Who needs to obtain such bonds?

A court bond may be required from various individuals in various cases, all connected to litigation before the court. Anyone entrusted to take care of another person’s property or finances may be forced to post a fiduciary bond via a probate court. It guarantees the caretaker will not take advantage of their position and faithfully perform their duties according to the requirements of the court. A person wishing to appeal a judgment before a higher court must post an appeal bond before the appeal is made. The relationship is needed to prevent misuse of the appellate system through insubstantial motions, and to guarantee that the appellant will follow the initial court decision.

Commercial bonds

Commercial bonds are typically purchased in compliance with state licensing and permit regulations by companies or working professionals. These bonds are relatively easy to apply for, as insurance companies usually see as low risk. It’s important to remember that commercial relationships are not linked to legal disputes, construction projects, or other contract work. If you are looking for bond information for contract projects, please see our Contract Bond Guide.

How much does a commercial bond cost?
There are numerous commercial bonds that can be written freely without a credit check, which ensures that the premium is set at a rate usually 1-3 percent of the bond amount. However, there are many commercial bonds which do require a credit check and several other underwriting factors such as industry experience and verification of solid financial standing. In the end, the cost of most commercial bonds would depend on the following factors:
  • Type of bond (including bond amount)
  • Personal Credit
  • Length of bond term

The premium varies for obligations requiring an underwriter’s review and is based on credit reviews or personal and professional qualifications. Highly qualified applicants are typically approved at 1-3 percent of the bond amount, while less qualified applicants are approved at slightly higher rates.

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