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The Value of Surety Bonds

The fashion in which public and private project owners evaluate and manage risk on construction projects can result in fiscally responsible decisions to ensure timely project completion. Since owners cannot afford to gamble on a contractor who is usually the low-bidder but whose ability may be uncertain, or who could end up bankrupt prior to completing the job, a surety bond is a great safety net for their investment.

What is Suretyship?

Suretyship is a very specialized line of insurance that is created when one party (an insurance company) guarantees performance of an obligation of another party.

What is a Surety Bond?

A surety bond is a written agreement whereby one party, the surety, obligates itself to a second party, the obligee, to answer for the default of a third party, the principal.

Types of Bonds

Contract (or Corporate) Surety Bond

The Contract (or Corporate) surety bond provides financial security and assurance for building and construction projects by assuring the project owner (obligee), that the contractor (principal), will perform the work, complete the project, and pay subcontractors, laborers, and material suppliers, as outlined via contract.

Contract surety bonds include:

  1. Bid bonds provide financial assurance that the bid received has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required performance and payment bonds.
  2. Performance bonds protect the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.
  3. Payment bonds guarantee that the contractor will pay certain subcontractors, laborers, and material suppliers associated with the project.
  4. Maintenance bonds guarantee against defective workmanship or materials for a specified period.
  5. Subdivision bonds make guarantees to municipalities such as cities, counties, or states that the principal will finance and construct certain improvements such as streets, sidewalks, curbs, gutters, sewers and drainage systems.

Commercial Surety Bond

Commercial surety bonds guarantee performance by the principal of the obligation or undertaking described in the bond.

Commercial surety bonds include:

  1. License and permit bonds are required by state or local regulations in order to obtain a license or permit to engage in a particular business (i.e. contractors, motor vehicle dealers, securities dealers, employment agencies, health spas, grain warehouses, businesses which collect liquor and/or sales tax).
  2. Judicial and probate bonds, also referred to as fiduciary bonds, secure the performance on a fiduciaries' duties and compliance with court orders (administrators, executors, guardians, trustees of a will, liquidators, receivers and masters). Judicial proceedings court bonds include injunction, appeal, indemnity to sheriff, mechanic's lien, attachment, replevin, and admiralty.
  3. Public official bonds guarantee the performance of duty by a public official, (treasurers, tax collectors, sheriffs, judges, court clerks and notaries).
  4. Federal (non-contract) bonds are required by the federal government for such businesses as Medicare and Medicaid providers, or those who collect customs, immigration, excise, or alcoholic beverage taxes.
  5. Miscellaneous bonds include coverage for lost securities, leases; and can guarantee payment of utility bills, or employer contributions to union fringe benefit plans, or self-insured workers’ compensation programs.

How is Suretyship Different from More Common Forms of Insurance?

  1. In traditional insurance, the risk of loss is transferred to an insurance company. However, in a suretyship, the ultimate risk remains with the principal and the protection of the bond is designated for the obligee.
  2. In traditional insurance, the insurance company assumes that part of the premium for the policy will be paid out in losses. Yet, in true suretyship, the premiums paid are "service fees" charged for the use of the surety company’s financial backing and guarantee.
  3. In underwriting traditional insurance products the insurer’s goal is to "spread the risk” among many businesses, while in a suretyship, coverage is seen as a form of credit extended to an individual business. Therefore, the emphasis is on a pre-qualification and selection process centered on the financial condition of the principal.

The Jacobs Company has great and diverse experience providing surety bonds and we are here to help! Please contact us today to learn more about our Bonding solutions.

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