Surety bonds protect consumers and hiring parties against abuse, fraud, deception, sudden bankruptcies, and penalties.
There are 3 parties involved in a typical bond:
- The Principal: Individual/business guaranteeing to fulfill a specific contractual task.
- The Obligee: Entity protected by the bond. Expects the Principal to perform a specific task.
- Surety: Insurer that issues and backs the bond, extending a line of credit to the Principal in case they fail to perform as expected.
Many consumers are not aware of the coverage that bonds offer, or confuse them with standard insurance policies. In this article, we’re going to clear up some of the most common questions that businesses have about surety bonds.
What’s the cost?
The cost depends on the type of bond required. Some bonds are inexpensive while others are quite expensive, each with its own unique cost structure. But in general, surety bonds cost between 1% -15% of the total bond value. It is based on the level of risk associated with the industry. Bonding insurance for cleaning business is essential as it has itinerant risks.
How do you apply for and obtain a bond?
The process of getting a surety bond is very simple. First, determine the type of surety bond and dollar amount that you need. Then file an application with the company and ask for a computation of the bond premium. Next, the insurer issues you a copy of the bond agreement and you pay the premium. You’ll receive a signed copy of the agreement and an original copy of the bond together with a Power-of-Attorney from the Surety. How long it takes to obtain depends on the type of bond. The entire process can be completed in a few minutes, but for complicated bonds, it may take multiple days.
What’s the real difference between a surety bond vs. insurance policy?
Unlike a traditional insurance policy where the Principal pays an ongoing premium for coverage, surety bonds are part insurance and part credit. Bonds are basically insurance policies for the Obligee that are backed and paid for by the Principal. The Surety sits in the middle – offering a guarantee of payment to one party from the other party. When the Principal purchases a surety bond, they are buying a line of credit. The Surety is trusting the Principal to complete the contract for the Obligee.
What about claims?
With the nature of bonds, a “claim” is rare. However, if you must file a claim on a bond, immediately contact the surety company or insurer. They will want to investigate the circumstances related to the claim. The issuer of the bond usually has different options to indemnify the Obligee (the recipient of the obligation).
What are the types of bonds?
There are thousands of surety bond types. Here are common and arguably the most useful:
- Contract: Guarantee the performance of obligations- Guarantee that the Principal will perform according to the terms of a written contract. Protect a project owner by guaranteeing a contractor’s performance and payment for labor and materials.
- Performance: Type of contract bond guaranteeing performance of the terms of a contract. Frequently incorporate payment bond (labor and materials) and maintenance bond liability.
- Payment: Type of contract bond guaranteeing payment of the contractor’s obligation under the contract for subcontractors, laborers, and materials suppliers associated with the project.
- Bid: Guarantees that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds. Used by owners to pre-qualify contractors submitting contract proposals.
About Moody Insurance Worldwide
Moody Insurance Worldwide, a division of Moody & Associates that was founded in 1914, is a leading provider of risk management programs and insurance coverage to individuals and businesses across the East Coast. We write all sizes of businesses, with technical expertise in many key industry areas, and provide personal insurance programs for estates and high net worth individuals. Our licensed, experienced commercial account managers can work with you to determine the coverage that you need at a competitive rate. Contact us today at (855) 868-0170 to learn more about what we can do for you.