What Entrepreneurs Need to Know About Surety Bonds

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What type of business needs surety bonds?

The following are the most common types of surety bonds required by businesses.

1) Contract Performance Bond:  A contract performance bond obligates a contractor to complete a contracted project in accordance with all the terms and conditions of the contract, including specifications, or else pay liquidated damages to its client. 

It is designed to ensure that when a construction contractor enters into an agreement with a property owner it will perform its contractual duties, meet deadlines for completion, maintain insurance coverage consistent with the type and dollar value of work being done, pay subcontractors according to their contracts or pay to default subcontractors’ surety bonds. This bond type is commonly-required when large projects exceed $50K.

2) Payment Bond – A payment bond guarantees that if the principal defaults on its obligation, the surety company will complete or cure any defect in work done by the contractor and pay all valid claims for labor, materials, and services rendered. Payment bonds are required when property owners hire contractors who then hire subcontractors to help complete a project. The payment bond gives subcontractors legal recourse against the property owner if they are not paid for their work.

3) License & Permit Bond – A license & permit bond is required of businesses making applications to governmental bodies for licenses or permits to conduct their affairs or use public property. The license & permit bond ensures compliance with local, state, and federal laws governing business activities, like contracting. If obligations under the license & permit bond are breached, the bond may be forfeited.

4) Fidelity Bonds – A fidelity bond is used to safeguard an employer against loss due to embezzlement or dishonest acts by its employees. This type of bond provides coverage for funds, securities, or other assets that are entrusted to the insured’s care. If there is a violation of trust by persons connected with the business, this protection enables an insurer to reimburse financial institutions and customers who suffered losses as a result. 

What is a surety bond for a business?

A surety bond is an agreement between three parties: the principal, the obligee (entity requesting the bond), and the surety. The bond guarantees that all conditions of a contract will be performed by the principal. If obligations under an agreement are breached, the bond may be forfeited to reimburse any financial loss suffered by another party involved in the agreement.

There are different types of contracts that can be secured with a surety bond. All these different types require that certain steps must be taken to ensure that all information relating to each one is included on your application before it is submitted for approval and underwriting.

How much does it cost? 

The surety bond premium is calculated on the face value of the contract. As a result, premiums vary based upon the dollar amount of work contracted to be completed or other obligations involved in ensuring that all contractual details are met.

How long do surety bonds last?

Contractual agreements between parties can last from one day to multiple years depending upon what activity or purpose they secure. In some cases, they may even exist for decades. This depends not only on what exactly must be performed under a particular contract but also on how well it is executed by all parties concerned with its completion. 

In most cases, a surety will require a renewal application and possibly new financial statements after at least 3-5 years have passed since an initial policy was issued. This is primarily due to their need to ensure that both parties to a contract still remain within the financial and legal requirements necessary for the bond’s placement and continued renewal.

Why are surety bonds important?

A surety bond is important because it protects you as a contractor, your customers, and the general public. It provides protection against losses due to the failure of your company or its employees to act according to state or federal laws. 

This means that should you fail to meet contractual requirements or fail to provide services that are satisfactory to the people who hired you, everyone involved-you, other involved contractors and subcontractors, and project owners-have recourse through this surety bonding program.

Who needs business surety bonds?

Any business with potential liabilities which exceed $50K will need a commercial surety bond in order to obtain licensure or approval for an activity requiring one. Some examples include but are not limited to contracting construction, cleaning services, landscaping, consulting, and others. 

This also includes individuals who are applying for independent contractor licenses in certain states such as New York, California, and Florida where such state approval is required to provide contracting services.

Do I still need a surety bond if I work in one of these states?

Yes! Although several states have recently made changes to their licensing requirements, the majority of states still require some type of bonding or contract security in order to allege and protect your customer’s interests. For specific licensure requirements in any given state, you should contact your local department/division of insurance or an attorney who specializes in that particular topic.

In addition to being licensed or bonded anywhere else, there are generally two licensee classifications to consider:

  • General: This classification covers a wide range of businesses and individuals that provide contracting services to the general public.
  • Construction: This classification is for companies that only work within the construction industry such as electricians, plumbers, and HVAC technicians. They would not be allowed to provide contracting services outside of these fields.

To know more about Surety Bonds, visit Alpha Surety Bonds now!

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