Contract Surety Bonds
A contract surety bond guarantees that a contractor will perform the duties outlined in a construction contract. With a contract surety bond, the contractor is the principal who purchases the bond to protect the obligee from any harmful business practices. The obligee is the project owner. Contract surety bonds are typically used by the following people and organizations:
- Large construction companies
- General contractors
- Individual contractors
- Trade contractors such as electricians, carpenters, plumbers, etc.
- Subcontractors of the federal government with projects of $100,000 or greater
Types of Surety Bonds
Bid Bond: a type of construction bond that protects the owner or developer in a construction bidding process. It is a guarantee that you, as the bidder, provide to the project owner to ensure that if you fail to honor the terms of the bid, the owner will be compensated.
Performance Bond: a guarantee that the contractor will complete the project per the terms and conditions of the contract.
Payment Bond: a guarantee that the contractor will pay its subcontractors and material suppliers on the project.
Subcontract Bond: Performance & Payment bonds issued by the subcontractor to the prime contractor. Typically required on subcontracts with values greater than $100,000.
Land Reclamation Bond: a guarantee that the land affected by mining or similar permitted operations, is returned back to its approximate pre-mining condition or an agreed acceptable condition.
Maintenance Bond: Protects the owner of a completed construction project for a specified time period against defects and faults in materials, workmanship, and design that could arise later if the project was done incorrectly.
Supply Bond: ensures that a supplier will produce the supplies or materials specified in the contract.
These bonds are written with the Union as the obligee and are required when a company wants to hire an employee represented by a union.
Wage & Welfare Bonds: required in cases when a company wants to hire an employee represented by a union. The bond guarantees that the employer will cover all due payments on wages and welfare for the union employee.
Fringe Benefits Bonds: guarantee that fringe benefits earned by laborers will be paid in line with the contract between the union and company hiring the union employee.
Commercial Surety Bonds
Commercial bonds are typically purchased by companies or working professionals in compliance with state licensing and permit regulations.
License & Permit Bond: required by a government organization when a professional applies for a license like a contractor’s license. These bonds protect against failure to follow the codes and regulations of a professional license. The most common professions that require a license and permit bond include contractors, electricians, plumbers, and non-resident professionals.
Mortgage Broker Bond: required by the state to protect borrowers from the harmful business practices of mortgage brokers. The bond guarantees that mortgage brokers will comply with state-specific laws and regulations outlined in their mortgage broker license code. Mortgage broker bonds like mortgage broker licenses are state specific.
STAMP (Securities Transfer Agents Medallion Program) Bond: required by the Securities Transfer Association to insure that guarantees issued by the participant financial institution will be immediately honored by transfer agents.
Liquor Bond: required for companies that sell, manufacture, and/or warehouse liquor.
Utility Bond: ensures that a business or person will pay for all utilities.
Warehouse Bond: makes sure that items stored in a warehouse will be delivered as planned.
Auctioneer Bond: required for auctioneers and auction houses to protect auctioned items, bids, and purchases.
Lottery Bond: Any business that sells lottery tickets is required to have a lottery bond.
Fuel Tax Bond: required by businesses that sell fuel to ensure that the proper taxes are paid.
Auto Dealer Bond: assures that auto dealers comply with the law as it relates to car sales.
AG Dealer Bond: required by the Department of Agriculture for people or businesses that buy and sell agricultural products.
Cemetery Association Bond: guarantees the company or individual who owns the property will keep it well-maintained and will ensure that nothing happens to any graves.
Court Surety Bonds
Court bonds may be required during legal proceedings. The bonds are designed to protect an individual and his/her assets until court proceedings are completed. They typically provide some form of financial recourse as a protection for one of the involved parties to the legal proceedings.
Bail Bond: a written promise signed by a defendant and surety to ensure that a criminal defendant will appear in court at the scheduled time and date, as ordered by the court.
Cost Bond: used to guarantee payment of court costs in the case of an appeal.
Administrator Bond: required to protect the appointed administrator of an estate when the deceased does not have a will.
Guardianship Bond: guarantees that a guardian will act in the best interest of a minor or incapacitated person that they are responsible for.
Estate Bond: mandated by the court in order to provide assurance that the executor of an estate properly allocates the assets for an incapacitated or deceased person with whom they have been assigned fiduciary duties.
Attachment Bond: required by the courts before they can legally seize a person’s property as part of a judgment. Guarantees that a defendant will be paid any damages as a result of the attachment.
A Fidelity Bond protects companies against financial loss due to employee fraud and theft. Unlike other bonds, a fidelity bond looks more like insurance than a surety bond. Depending on the case, it can protect both the business obtaining the bond and its clients from the business’s employees.
These bonds are often obtained by janitorial services; in-home service providers such as nursing care, pet sitters or home-cleaning companies; restaurants or bars and boutiques or shops.
Other fidelity bonds include:
Employee Dishonesty Bond: is a unique surety bond in that it’s purchased by a company to protect the business itself. Employee dishonesty bonds protect a business against financial losses due to an employee or group of employees. Financial losses include such things as money, financial securities, or even property. Employee dishonesty bonds are commonly used by nonprofits.
ERISA Bond: created as part of the Employee Retirement Income Security Act of 1974. ERISA surety bonds require that trustees of large funds such as pension plans have a bond equal to 10% of the fund’s total assets. An ERISA bond protects participants and beneficiaries from the malpractice of the fiduciary managing their retirement plans.
What is needed when applying for a bond?
When applying for a bond you are telling the underwriter about yourself and your company to prove that you’re responsible and experienced enough to complete the job for which you need a bond. The bond is a commitment to back you and your company; carriers will not give them out to just anyone.
What you should have prepared:
- You will need to provide both personal & corporate financial information, including:
- The corporate financial statements for the last calendar year and interim compilation for this year
- Personal financial statements of the owners and their spouses
- Copies of the most recent corporate and personal tax returns
- A bank reference letter and recent bank statements
- A completed application from the insurance company. The application will require information about your company like your tax ID, state of incorporation, how long you have been in business, past experience and the number of employees in your company.
- References from previous jobs and suppliers that will tell the company that you finish your jobs and pay your bills. Overall, the insurance company wants to make sure you’re responsible and reliable.
- Resumes of key personnel, including certifications, work experience and time with the company.
- A certificate of insurance will be required to show that you have the proper insurance coverage for the work that you are performing.
- If you have been bonded before in the past you will also be asked for claim experience and any information on losses that may have occurred.
- For surety bonds, the underwriter will want to see a Work in Progress (WIP) form. This form lets carriers see your timeline for work: what you’ve completed recently and what other work you have coming in the near future. It should also include any other surety bonds that are outstanding. The WIP is required for the current and past year. If you don’t have a form of your own many companies have a template you can use.
If you have any questions or would like additional information, please fill out the form below or call us at 607-734-4291.