Project Owners: Learn How Surety Bonds Mitigate Risk and Increase Project Success
At Sandy Spring Insurance, we are committed to providing you the best service, personal attention and customized solutions to help protect your business and family. With insurance solutions that are tailored to meet your needs, our team of experts can help find the right combination of coverage for you. One way we can protect project owners and their business is through surety bonds.
What is Suretyship?
Since private owners cannot afford to gamble on a contractor whose reliability is uncertain, a surety bond is a great safety net for the investment. Suretyship is a very specialized line of insurance that is created whenever one party guarantees performance of an obligation by another party.
A surety bond is a written agreement that includes three parties:
- The principal is the party that undertakes the obligation.
- The surety company guarantees the obligation will be performed.
- The obligee is the party who receives the benefit of the bond.
There two main types of surety bonds, contract surety bonds and commercial surety bonds.
Contract Surety Bonds
Contract (or corporate) surety bonds provide financial security and construction assurance for building and construction projects by assuring the project owner (obligee) that the contractor (principal) will perform the work and compensate certain subcontractors, laborers and material suppliers, as outlined via their contract. Contract surety bonds include the following:
- Bid bonds provide financial assurance that the bid has been submitted in good faith and that the contractor intends to enter into the contract at the price bid and provide the required performance and payment bonds.
- Performance bonds protect the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.
- Payment bonds guarantee that the contractor will pay certain subcontractors, laborers and material suppliers associated with the project.
- Maintenance bonds guarantee against defective workmanship or materials for a specified period.
- Subdivision bonds make guarantees to cities, counties or states that the principal will finance and construct certain improvements such as streets, sidewalks, curbs, gutters, sewers and drainage systems.
Commercial Surety Bonds
Commercial surety bonds guarantee performance by the principal of the obligation or undertaking described in the bond. Commercial surety bonds include the following:
- License and permit bonds are required by state law or local regulations in order to obtain a license or permit to engage in a particular business (e.g., contractors, motor vehicle dealers, securities dealers, employment agencies, health spas, grain warehouses, liquor and sales tax).
- Judicial and probate bonds, also referred to as fiduciary bonds, secure the performance on a fiduciaries' duties and compliance with court orders (e.g., administrators, executors, guardians, trustees of a will, liquidators, receivers and masters). Judicial proceedings court bonds include injunction, appeal, indemnity to sheriff, mechanic's lien, attachment, replevin and admiralty.
- Public official bonds guarantee the performance of duty by a public official, (e.g., treasurers, tax collectors, sheriffs, judges, court clerks and notaries).
- Federal (non-contract) bonds are required by the federal government (e.g., Medicare and Medicaid providers, customs, immigrants, excise, and alcoholic beverage).
- Miscellaneous bonds include lost securities, lease, guarantee payment of utility bills, guarantee employer contributions for union fringe benefits and workers’ compensation for self-insurers.
By obtaining a surety bond, you can transfer the risks associated with completion dates and quality concerns to a surety company.
Wealth and Insurance products are not FDIC insured, not guaranteed, and may lose value.
Sandy Spring Insurance Corporation is a wholly owned subsidiary of Sandy Spring Bank.
This material is provided solely for educational purposes and is not intended to constitute tax, legal or accounting advice, or a recommendation for any particular transaction.