Bonding

Surety bonds refer to any bond involving three parties: the principal (person responsible for fulfilling an obligation), the obligee (the party to whom the obligation is owed), and the surety (the third party responsible for guaranteeing the principal’s performance). With that being said, there are two primary classifications of surety bonds:

• Contract: These bonds are typically required to be carried by Construction Contractors and subcontractors. These bonds will be required for almost all public work and some private jobs if an outside lender is involved. These include bid, performance, payment, and maintenance/warranty bonds.
• Commercial: Commercial surety bonds include license and permit, public official, and court. Government agencies typically use these bonds.

It is important to know that Allied Insurance Managers tries to avoid collateral deals at all cost. There are specific types of bonds, such as Release of Lien bonds, that require some form of collateral. However, aside from that, we do not like these options. License and permit bonds and small contract bonds typically don’t require collateral. Collateral can sometimes be required in scenarios where:

• The bond obligations are larger or more complex.
• The location of the project is in an area not familiar to the contractor (such as out of the county).
• The principal does not have strong enough finances to support the job or lacks a solid track record.

It all comes down to the surety (the person providing financial security until the principal fulfills their obligation). If the surety feels like the bond is risky, they may be willing to consider a collateral option or a higher bond rate.

Underwriting requirements, including credit, will vary depending on the surety company and bond amount. As far as personal credit scores go, subprime credit (below mid-600s) may still be accepted, depending on the scenario and contract size, but scores in the high-600s or 700 are preferred. However, other factors are taken into account beyond personal credit, including corporate financial statements strength, past performance,  experience, current work in progress reports, scope of work being performed, personal net worth, and any additional financial credit support, such as a bank line of credit.

1. Filing the Claim: If the principal doesn’t meet their obligations, the obligee or a party protected by the bond are the ones responsible for filing a claim with the surety company. For example, if the owner of the project who paid for the work to be performed was delayed opening because the principal was behind on work and did not perform work to the specs laid out in the contract, they can file a claim. Also, a subcontractor that was not paid for the work they performed can file a claim or lien on the bond as well.
2. Investigating the Claim/Determining Claim Validity: The surety company will then investigate the claim, which involves reviewing the contract, the details of your claim, and the bond form.
3. Acting on the Claim: If the claim is valid, the surety company will work internally to resolve it/come up with a solution, then act on their decision, whether that’s compensating the obligee, defending the principal, or finding another person to finish the work.

What’s important is that bonds are different from typical insurance—they are a form of credit, so if the surety company decides to pay the obligee, the surety will then seek reimbursement from the principal. The principal is contractually obligated to reimburse the surety and commonly signs an agreement both on behalf of their business and personally.

Bonds are most common in the construction industry—construction contractors and subcontractors will often need bid, performance, or payment bonds to complete public or private projects. Other types of businesses or types of positions that often need bonds are mortgage brokers, insurance brokers, auto dealerships, union officials, electrical contractors, plumbing contractors, fiduciaries, check-cashing services, public officials, security firms, and freight brokers, and notaries.

The duration of a bond depends on the type of bonding solution and the contractual obligation. For example, construction bonds, like performance or payment, will last for the project’s duration, while license and permit bonds last as long as the license remains active (usually one year).

No, they are generally not refundable. Unlike insurance, where you could receive a partial refund, surety premiums are fully earned at issuance and cannot be refunded. In some cases, like in license and permit bonds, prorated refunds may be allowed if the bond is canceled partway through the term.

Before agreeing to any bond, we recommend looking over the cancellation clause.

Yes, it is possible. However, increasing the bond amount can be lengthy because you will need to request an underwriting review and approval from your surety company, so plan accordingly. This will also require all original copies of the bond to either be reproduced or have an original rider created that edits the original bond. If you know licensing requirements or project scope will change, you need to notify your surety company as soon as possible.

When requesting an increase, your surety company will review your updated financial documentation, including statements, credit information, and any updated scope of work.

If the increase is approved, the surety will issue a bond rider (or endorsement), which is an amendment to the original bond form.

Keep in mind that increasing your bond amount will typically mean higher premiums.

Requirements will vary based on the type of bonding solution you need. However, the general rule of thumb is financial stability and a good reputation. If you can prove that your business is financially stable and low-risk (in terms of past projects/bonds and claims history), then you’ll likely have no problem obtaining a bond.

You might be tired of hearing “It depends,” but the cost will vary based on the type of bond you receive, your licensing or project requirements, and your company’s financial strength.

There are two different types of fees involved with bonds: the premium and the bond amount. The bond amount is the potential coverage provided to the obligee if the principal fails to meet the obligation, while the premium acts as a non-refundable fee paid to the surety.

License and permit bond premiums often cost between 1 and 5% of the bond amount, if the applicant has good credit and solid finances, while contract bond premiums can range between 0.5 and 3% of the contract amount.

Strong credit, strong finances, and strong track records can all help lower the cost of the bond amount AND premiums.

To get a better idea of how much your bonding solution would cost, please contact one of our agents at Allied Insurance Managers.