Surety Bonds

Surety Bonds vs. Insurance

1. Insurance-- form of risk management. -Two-party contract between the insured and the insurance company. -Policy assumes a guaranteed promise that the insured will be compensated by the insurance company in the case of a covered loss. -Losses are expected and insurance rates are adjusted to cover losses depending on many factors. Premium designed to cover potential losses insured may incur -If client has a claim against his Property or Liability policy, the company pays the claim on his behalf (if coverage exists). -Company is NOT allowed to recoup any of these amounts from the insured, since the payment is why the client bought the policy and since that is how the contract was written. -the client gave up a little bit of premium in return for the promise that the company would pay out a potentially large amount in a claim -Rates can be raised, canceled, or non-renewed, but the company cannot recover the claim money paid out. 2. Surety Bond- contract among at least 3 parties. Issued by a surety company on behalf of a second party known as the principal. -Contract guarantees that the second party will complete an obligation to a 3rd party, known as the obligee. -If obligation is NOT met, the third party (the obligee) can recover its losses from that bond. -Losses are NOT expected so they are only issued to qualified individuals or businesses whose projects require a guarantee. -Form of credit, so principal is responsible for paying any claims -Rates can be raised, canceled, or non-renewed, -BUT the company cannot recover the claim money paid out. -Bonds are NOT insurance and no claims are expected. -Therefore, if a bond has to pay out on a clients behalf, the company has the right to recovery from the client for every penny paid out. -In a sense, surety is similar to banking, in that bankers expect their loans to be fully repaid. -Additionally, surety insurers usually require that the principal personally sign an Indemnity Agreement, which states that in the event of default, the surety may place a lien (right to keep possession of property belonging to another person until a debt owed by that person is discharged) against the personal assets of the principal in order to recover the loss paid out.

Claim condtions

Bonds can be written so coverage only applies if a claim is made during the actual bond period, OR they can provide coverage once loss is discovered if the event took place during the bond period.

Types of Surety Bonds

Contract Bond- Bid Contract- Performance Bond Completion Bond- Supply Bond- Judicial Bond- License & Permit Fidelity Bonds

Surety Bonds

Surety bonds guarantee a commitment that's made to the principal. -Protects the party that the principal is doing business with or providing services for. Bonds can be written so coverage only applies if a claim is made during the actual bond period, OR they can provide coverage once loss is discovered if the event took place during the bond period Surety bonds are NOT insurance, although they are transacted within the P&C insurance industry. Insurance policies are based on the uncertainty that a loss will occur Bonds, on the other hand, guarantee that something will or will NOT occur.

On every Surety bond, the three parties included are:

The Obligee The Principal The Surety or Guarantor

3. The Surety or Guarantor

assures the obligee that the principal can perform the task. Aka company supplying bond. insurance company that provides the bond in consideration for the premium paid. Surety joins with the principal to guarantee the fulfillment of the obligation and agrees to pay damages to obligee if principal defaults

Bid Contract

contract surety bond that guarantees a contractor will comply with a bid contract. Assures a project owner that the contractor has the ability to complete a project to the specifications outlined in the submitted bid bond. Stops contractors from backing out from a bid after the work has been won. Typically required on any federal and/ or commercial projects. Reduces project owners risk and makes them more likely to accept the bid of a new contractor.

Contract Bond

ensures obligations of a construction contract are met. Contractor is the principal who purchases the bond to protect the obligee from any harmful business practices. In this case, the obligee is a project owner or investor. Typically required for commercial and federal real estate projects. Used by: General contracts Construction companies Subcontractors of the Fed Govt

Surety bond provides protection for the obligee, or the project owner.

however, they're NOT off the hook financially for any premium costs or potential losses. In most cases, the principal, or entity whose obligations are guaranteed by a bond, will sign an indemnity agreement that stipulates he or she will repay the surety bond company if it pays out a claim. If the principal can't actually cover the payment, compensation falls to the surety company that issued the original bond. Designed to protect the obligee that has entered into a contract with a second party. A surety bond is a form of credit so the principal is responsible for paying any claims. INSURANCE is designed to cover potential losses that an insured may incur.

Fidelity Bond

including Employee Theft, Public Official, Financial Institution and Fiduciary guarantee the proper handling of funds by employees of a business, public officials, banks, and anyone acting in a fiduciary capacity.

The Obligee

party or recipient of an obligation. Aka person requiring the bond. The party for whose benefit the bond is written. If principal defaults on the obligation, damages are payable by the surety to the obligee.

The Principal

primary party who will perform the contractual obligation. Aka person needing the bond. They are responsible for claims and must cover any losses as a result of a claim. Party agreeing to perform the obligation and purchases the bond at the request of the obligee, or as required under the terms of a contract with the obligee.

Judicial Bond

required by the courts in order to secure a party's costs of appeal, attachment, and injunction. In other words, it's a surety bond posted by a party to a lawsuit to indemnify the opposing judicial or governmental body party from any losses arising from delay or depravation caused by the legal proceedings. In general, all bonds required in judicial proceedings are called judicial bonds.

Completion Bond

surety bond that a contractor submits to a bank or other creditor that has disbursed a loan to finance a project. Creates a guarantee between the obligor and its lender as obligee. Ensures that a creditor still receives principal and interest on a loan even if the project itself fails to reach completion. Implicity ensures that there are NO outstanding liens from participating contributors (employees, suppliers, and subcontractors) once project is complete

Performance Bond

surety bond that protects a project owner against a contractor's failure to complete a project as agreed. They "bond" specific agreements outline in a construction contract Guarantees obligee receives compensation for any losses in connection with a breach of contract on the part of the obligor. If bonded obligations are NOT met, an obligee can claim financial damages. Typically required as part of a bid bond Typically guarantee 100% of a contracts total cost. If contractor fails to meet bonded agreements within construction contract, project owner can claim financial damages up to 100% of the contract price. Damages are covered by the surety and repaid by the principal.

Supply Bond

type of contract bond that guarantees the supplier will furnish supplies or materials as contracted. Should the supplier default, the surety bond protects the purchaser from any losses, and the surety will underwrite the purchaser of the supplies against the loss.

License & Permit Bond (Commercial pr'License Bonds)

type of surety bond sometimes referred to as 'Commercial Bonds' or 'License Bonds.' Guarantees that a business will operate in accordance with federal, state, or local laws and regulations. Each license bond is specific to one industry, and protects customers and/or the state from damages. License bonds protect govts' and consumers from fraudulent practices committed by the business that is bonded. In any industry that requires bonding, each business must be licensed and bonded before they are legally allowed to operate. Allows contractors to work in the jurisdiction provided the contractor guarantees through the bond to do work according to local building codes