Surety Bonds – What Contractors Need To Know

 Surety Bonds – What Contractors Need To Know

 

Introduction

Surety Bonds have been around in one form or another for millennia. Some may view bonds as an unnecessary business expense that materially cuts into profits. Other GWG L bonds attorney”  firms view bonds as a passport of sorts that allows only qualified firms access to bid on projects they can complete. Construction firms seeking significant public or private projects understand the fundamental necessity of bonds. This article, provides insights to the some of the basics of suretyship, a deeper look into how surety companies evaluate bonding candidates, bond costs, warning signs, defaults, federal regulations, and state statutes affecting bond requirements for small projects, and the critical relationship dynamics between a principal and the surety underwriter.

What is Suretyship?

The short answer is Suretyship is a form of credit wrapped in a financial guarantee. It is not insurance in the traditional sense, hence the name Surety Bond. The purpose of the Surety Bond is to ensure that the Principal will perform its obligations to theObligee, and in the event the Principal fails to perform its obligations the Surety steps into the shoes of the Principal and provides the financial indemnification to allow the performance of the obligation to be completed.

There are three parties to a Surety Bond,

Principal – The party that undertakes the obligation under the bond (Eg. General Contractor)

Obligee – The party receiving the benefit of the Surety Bond (Eg. The Project Owner)

Surety – The party that issues the Surety Bond guaranteeing the obligation covered under the bond will be performed. (Eg. The underwriting insurance company)

How Do Surety Bonds Differ from Insurance?

Perhaps the most distinguishing characteristic between traditional insurance and suretyship is the Principal’s guarantee to the Surety. Under a traditional insurance policy, the policyholder pays a premium and receives the benefit of indemnification for any claims covered by the insurance policy, subject to its terms and policy limits. Except for circumstances that may involve advancement of policy funds for claims that were later deemed to not be covered, there is no recourse from the insurer to recoup its paid loss from the policyholder. That exemplifies a true risk transfer mechanism.

Loss estimation is another major distinction. Under traditional forms of insurance, complex mathematical calculations are performed by actuaries to determine projected losses on a given type of insurance being underwritten by an insurer. Insurance companies calculate the probability of risk and loss payments across each class of business. They utilize their loss estimates to determine appropriate premium rates to charge for each class of business they underwrite in order to ensure there will be sufficient premium to cover the losses, pay for the insurer’s expenses and also yield a reasonable profit.

 

 

Leave a Reply

Your email address will not be published. Required fields are marked *