GDI Insurance Agency: Your Surety Bond Experts
Below is just a quick recap of some of the types of surety bonds we can help with.
We have had great success helping some of our larger projects obtain the large bonds needed to secure their projects. We have also created many alternatives that we have used while working on some of these projects.
Keep in mind just because you don’t see it here, doesn’t mean it cant be done. An example of a modified use of traditional bonds would be to use a performance bond instead of using a stand by letter of credit.
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What is a Surety Bond?
A surety bond is a written agreement where one party, the surety, obligates itself to a second party, the oblige, to answer for the default of a third party, the principal.
Why use surety bonds?
The way project owners evaluate and manage risks on construction projects and make fiscally responsible decisions to ensure timely project completion are crucial to their success. Since private owners cannot afford to gamble on a contractor whose reliability is uncertain or who could end up bankrupt halfway through the job, a surety bond is a great safety net for the investment.
What is Suretyship?
Suretyship is a very specialized line of insurance that is created whenever one party guarantees performance of an obligation by another party.
Types Of Surety Bonds
- Contract (or Corporate) Surety Bond The contract bond also known as a corporate surety bond provides financial security and construction assurance for building and construction projects by assuring the project owner referred to as the obligee that the contractor which is called the principal will perform the work and compensate certain subcontractors, laborers and material suppliers, as outlined via their contract. Contract surety bonds include:
- Bid bonds provide financial assurance that the bid 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.
- Performance bonds protect the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.
- Payment bonds guarantee that the contractor will pay certain subcontractors, laborers and material suppliers associated with the project.
- Maintenance bonds guarantee against defective workmanship or materials for a specified period.
- Subdivision bonds make guarantees to 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:
- License and permit bonds are required by state law or local regulations in order to obtain a license or permit to engage in a particular business (contractors, motor vehicle dealers, securities dealers, employment agencies, health spas, grain warehouses, liquor and sales tax).
- 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.
- Public official bonds guarantee the performance of duty by a public official, (treasurers, tax collectors, sheriffs, judges, court clerks and notaries).
- Federal (non-contract) bonds are required by the federal government (Medicare and Medicaid providers, customs, immigrants, excise and alcoholic beverage).
- Miscellaneous bonds include lost securities, lease, guarantee payment of utility bills, guarantee employer contributions for union fringe benefits and workers’ compensation for self-insurers.
- Who Are the Three Parties That Make Up the Surety Agreement?
- The principal is the party that undertakes the obligation.
- The surety company guarantees the obligation will be performed.
- The obligee is the party who receives the benefit of the bond.
How is Suretyship Similar to Other Forms of Insurance?
- State insurance commissioners regulate both.
- They both provide a safety net for financial loss.
How is Suretyship Different?
- In traditional insurance, the risk is transferred to the insurance company. However, in a Suretyship, the risk remains with the principal and the protection of the bond is designated for the oblige.
- 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.
- In underwriting traditional insurance products, the goal is to “spread the risk,” while in a Suretyship, surety professionals view their underwriting as a form of credit. Therefore, the emphasis is on the pre-qualification and selection process.
Since 1893, the U. S. Government has required contractors on federal public works contracts to obtain surety bonds to guarantee that they will perform such contracts and pay certain labor and material bills. The current federal law on federal public works is known as the Miller Act. It requires performance and payment bonds for all public work contracts in excess of $100,000 and payment protection, with payment bonds the preferred method, for contracts in excess of $25,000. Almost all 50 states, the District of Columbia, Puerto Rico and most local jurisdictions have enacted similar legislation requiring surety bonds on public works as well. These are generally referred to as “Little Miller Acts.”
While surety bonds are mandated by law on public works projects to protect taxpayer dollars, the use of surety bonds on privately-owned construction projects is at the owner’s discretion. Alternative forms of financial security, such as letters of credit and self-insurance, don’t guarantee performance or payment protection of a surety bond or assure that a contractor is competent.
With a surety bond, the risks of project completion are shifted from the owner to the surety company. For that reason, many private owners require surety bonds from their contractors to protect their company and shareholders from the enormous cost of contractor failure. Subcontractors may be required to obtain bonds to help the prime contractor manage risk, particularly if the subcontractor is completing a significant part of the job or is a specialized contractor who is difficult to replace.
How Do Contractors Obtain A Surety Bond?
Surety bonds are issued through agents and brokers who are knowledgeable about the surety and construction industries. Agents and brokers usually work for companies that specialize in surety bonds or in insurance agencies that have a sub-specialty in surety bonds.
The professional surety bond agent or broker usually maintains a business relationship with several surety companies, which enables them to match a contractor with an appropriate surety company. Also, a solid surety company and producer will help a contractor maintain and increase its capacity.
Like so many things in this world the key to getting your surety bonds approved starts by working with bonding experts. GDI Insurance Agency, Inc. has proven itself as an insurance agency that knows and is dedicated to getting you the bonds you need! Just one quick call to a GDI broker and we can start helping!
Small or Large Bonds, Simple bonds, or Unique Bonds: One call gets you the bonds you need! 1-888-991-2929
Ps. Here are some examples of some projects we have worked on that needed complex bonding. The reason we showcase the more complex use of bonds is to demonstrate that we can handle the small and large bonds. Visit our Credit Enhancement Bonding and Insurance Page.
Contractors Bonding. Below is a quick overview of construction bonding, and how to get contractors bonds, subdivision bonds, Performance and payment bonds. Take a look and give us a call.
Understanding Contractors Surety Bonds Presentation