Surety Bonds are sometimes required by businesses to guarantee the work they are contracted to do will be completed.
What are surety bonds?
Surety Bonds are a type of coverage some businesses are required to carry when performing contracting work and it guarantees either the work they are contracted to do will be accomplished, or that they will be required to pay the amount of the bond if they don’t. Every surety bond will be specific to the exact needs of the work scenario.
Surety Bonds are relatively simple to understand. Three parties are involved with a surety bond policy: the oblige, the principal, and the surety.
– The obligee is the entity that requires the bond be purchased by the principal
– The principal purchases the surety bond which guarantees completion and quality of the contracted work
– The surety is the bond issuer who financially guarantees the ability of the principal to complete the contracted work
If the work isn’t completed by the principal as contracted, then the obligee will be able to make a claim for payment form the bond up to but not exceeding the amount of the surety bond amount. Then, the principal is obligated to pay back the claimed amount to the surety, or bond issuer.
When Does a surety bond make sense?
Contractors who seek work on government contracts are usually required to carry a surety bond policy to mitigate risk. They may also be required for companies and persons that are licensed by a governmental entity.
Surety bonds make sense when a contractor requires a certain level of performance, because they help to compensate the obligee if a principal fails to meet the agreed upon contractual obligations for the work being contracted. It doesn’t make sense to acquire a surety bond when the number of possible damages is negligible or small.
How much do surety bonds cost?
A few different factors influence the overall cost of a surety bond. These include the length of time for coverage, bond type, risk, the principal’s credit score and past claims history, financial wherewithal, and other factors. The surety bond premium can vary based on the information for these factors involved.
Surety Bond requirements vary, and each state and their governing agencies define them. The oblige will inform you if they require a bond and will define the bond type and amount of coverage needed.
Family Insurance has many professional brokers ready to help you learn more about surety bonds as well as find you the right quote for a surety bond program that’s right for your project or business.