What is Suretyship?
Suretyship is a very specialized line of insurance that is created whenever one party guarantees performance of an obligation by another party. There are three parties to the agreement. The principal is the party that undertakes the obligation. The surety guarantees the obligation will be performed. The obligee is the party who receives the benefit of the bond.
What is a Surety Bond?
Surety bonds are usually required of general contractors on public projects let by federal, state or local government agencies. But many subcontractors also find that they are being asked to provide bonds. And an increasing number of private project owners are requiring bonds as well. Simply stated, a surety bond is an agreement under which one party, the surety, guarantees to another, the owner or obligee, that a third party, the contractor or principal, will perform a contract in accordance with contract documents. In the case of a subcontract, the general contractor is the obligee, and the subcontractor is the principal.
There are three types of contract surety bonds. The first, the bid bond, provides 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. The second, the performance bond, protects the obligee from financial loss should the contractor fail to perform the contract in accordance with the terms and conditions of the contract documents. The third kind of contract bond is the payment bond which guarantees that the contractor will pay certain subcontractor, labor and material bills associated with the project.
How to get Surety Bonds?
Since most companies issue surety bonds through producers, also called agents or brokers, your first step toward taking on bonded work is to discuss your plans with a professional surety bond producer. You will find that an agent who specializes in insurance and bonding for the construction industry is likely to be the most qualified to assist you. The surety bond producer will guide you through the bonding process and assist you in establishing a business relationship with a surety company.
Even though most surety companies are also large insurance companies, qualifying for bonds is more like obtaining bank credit than purchasing insurance. Like your bank, a surety company wants to know you well, before committing its assets. Most contractors find that it is necessary to spend a lot of time and effort establishing their first relationship with a surety company. Since the surety is guaranteeing your company’s performance, it needs to gather and carefully analyze much information about you and your firm before it will agree to provide bonds.