A surety bond is an agreement between the surety and a third party, known as an obligee, to correct a default by the principal (applicant) should the principal not meet its contract or statutory obligation. In other words, the surety acts as a co-signor where it guarantees that the principal will take care of its obligations. The principal will be required to sign a general indemnity agreement which promises to make the surety whole should they pay out on a claim made by an obligee.
A performance bond is an agreement between the surety and a third party, known as the owner or obligee that guarantees that the principal will complete all terms of a specific contract. The key characteristic of a performance bond is that it is for a specific contract and the obligation is easily defined as such. A payment bond normally accompanies the performance bond and is considered part of the same obligation thus no additional premium is required when issued with the performance bond.
A payment bond is an agreement between the surety and a third party, known as the owner or obligee that guarantees that all of the materials and subcontractors will be paid on a specific job per the contract. This obligation is contract specific. This is the most common type of claim on a construction contract default. This obligation is meant to keep a project free of liens. It is required for almost all public construction jobs as the bond takes the place of the property lien rights (since public property cannot be the subject of a lien). The payment bond is normally issue with a performance bond and is considered part of the same obligation with no additional premium.
The General Indemnity Agreement (also known as the GIA) is the promise between the principal (applicant) and surety that the principal will make the surety whole should the surety pay the obligee for a claim. Surety bonds are underwritten to a zero loss meaning that the surety does not anticipate a loss on a bond. In most cases the indemnity or promise to pay the surety will include the principal company, majority owners and spouses, the owners trust, and affiliate companies. The intent is to prevent assets to be transferred out of a failing entity and also to show good faith that the principal is willing to stand behind the business.
The short answer is that a commercial bond is a bond for non-construction risks. They do not guarantee completion of a specific contract. There are several types of commercial bonds. Those bonds include:
License bonds are required by a state’s code or statute. The bonds guarantee that the licensee will conduct their business in compliance with the individual code or statute that governs their particular license. The risk thus premium associated with the bond will depend on the class of business and what is considered a valid claim on the bond. For example, a process server bond is written freely with very little underwriting information because compliance with the license is very easy and with very limited financial risk.
Permit bonds are normally associated with a municipality that requires a permit for a particular task. The bond guarantees that the principal will comply with the rules associated with the permit. For example, a permit might be required for production of a festival. The bond would guarantee that land used will be returned to the condition prior to the event. The qualification for permit bonds is generally easy depending on the scope of the permit.
Financial guarantee bonds require stricter underwriting than most of the other commercial bonds. These bonds include wage and welfare bonds, utility deposit bonds, and various tax bonds. The only obligation of the bond is that the principal will pay the obligee funds when the payment is due. Business failure almost always triggers a claim on the bond which is not the case with most license bonds.
Public official bonds simply guarantee that the public official will carry out the duties of the elected or appointed office. Most of these bonds are considered low risk and are written freely.
Indemnity bonds cover obligations such as lost instruments. The obligation is such that the bond indemnifies a third party should the original instrument be found and the third party is obligated to pay funds under the bond. The underwriting criteria vary depending on the nature of the instrument lost.
You must be logged in to post a comment.