Surety Bond Insurance
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A Surety Bond is a contract between three parties: a professional surety agent, a pre-qualified contractor (principal), and a project owner (obligee), which binds the contractor to fulfill the terms and conditions of the contract. If the project isn’t completed successfully, the surety assumes the contractor’s obligations and ensures that the project is completed.
A surety is a way to protect yourself legally from a financial loss. They are very common in the construction industry, and are also used by notary publics, auto dealers, mortgage brokers, and insurance agents, among others.
What Surety Bond Insurance Is Not
A surety bond isn’t a loan or a line of credit extended to contractors. Rather, it’s a guarantee that the surety agent will fulfill the terms of the contract between the contractor and the project owner should the contractor fail to do so. Therefore, surety agents carefully select which contractors they will cover, and may be reluctant to take on new contractors or those with poor performance.
Technically, surety bonds are not the same thing as insurance. Insurance tends to protect against something bad happening, whereas surety bonds operate with the assumption that nothing bad will happen.
Things to Think About
The first thing to consider is whether or not the government requires a surety bond. This is often the case for major construction projects and public works projects over $100,000. State requirements may vary.
You’ll also want to assess how much financial risk is involved if the project isn’t completed properly or on time. Surety costs (penalties) tend to range from 1 to 3% of the total contract amount, although very large projects may cost less than 1% of the total.
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Frequently Asked Questions (FAQs)
Get clear answers to common insurance questions and important details to guide your coverage decisions.
What is Surety Bond Insurance?
Surety Bond Insurance is a three-party agreement that guarantees a business will fulfill its obligations under a contract. The three parties involved are the principal (business that needs the bond), the obligee (entity requiring the bond), and the surety (company that provides the bond). If the principal fails to meet the contract terms, the surety compensates the obligee and then seeks reimbursement from the principal.
Who needs Surety Bond Insurance?
Businesses across various industries, especially those involved in construction, government contracting, or other fields requiring compliance with licensing and permitting laws, need Surety Bond Insurance. Common users include contractors, auto dealerships, and businesses required by law to have bonds to operate.
What does Surety Bond Insurance cover?
Surety Bonds cover financial losses incurred by the obligee if the principal fails to fulfill the terms of a contract. This includes coverage for project completion, payment to subcontractors, or fulfilling other contract obligations as agreed. Specific types of bonds like performance bonds and payment bonds cater to particular contract requirements.
What is not covered by Surety Bond Insurance?
Surety Bonds do not cover the principal’s financial losses or act as a substitute for insurance. They are primarily guarantees to the obligee and do not cover damages due to unforeseen events, acts of nature, or personal business risks faced by the principal.
How much does Surety Bond Insurance cost?
The cost varies based on factors like bond type, bond amount, and the principal’s credit rating. Typically, premiums range from 1% to 15% of the bond amount. Higher-risk applicants or those in high-risk industries may pay on the higher end of this range.
Can I get a Surety Bond if I have bad credit?
Yes, many surety companies offer bad credit programs. However, you may face higher premium rates, and the surety may require additional financial assurances, such as collateral or indemnity agreements.
How do I choose the right Surety Bond Insurance?
To choose the right bond, assess your specific business needs and contract requirements. Work with a reputable surety provider that offers bonds approved by federal or state authorities. Ensure that the provider has a strong rating and is well-versed in the type of bond your business needs.
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