What are Surety Bonds
I mean, does any really know what the term surety bond really means (and does anybody really care)? There are a lot of bonds out there – from surety to treasury to other bonds, James Bonds.
This is a simple explanation/definition of a surety bond (sometimes called a surety guarantee, or fidelity bond). A fidelity bond / guarantee bond / surety agreement is a promise that someone (i.e., the commercial surety) will pay a specific dollar amount if someone else (called the Principal, e.g., the general contractor) fails to comply with some commitment as spelled out in a contract or other work-site agreement. So, what a surety agreement does is protect the Owner from a default by the Principal. The bond guarantee could also require that the commercial surety will perform, or get someone else who will perform, the job according to the specific terms in the contract.
The fidelity bond commitments are generally set forth in the bid requirements or specified in a contract. One of the places where we see these commitments are in construction contracts. In a typical construction contract, the surety guaranty protects the owner of the job site (sometimes referred to as the Obligee) against potential losses, which can arise from the general contractor’s failure to comply with the terms of the contract/fidelity bond.
Please note that although the terms requiring the bond usually occur in the main terms and conditions of the commercial agreement, that information may sometimes be in a miscellaneous clause or accounting clause.
Call us at (913) 214-8344 to start your Bond Application today!
Do you Need a Surety Bond?
Well, most likely, yes. Most construction contracts are now requiring a bond from their contractors. The reason for this is that they are wanting to reduce the risk on any given project as much as possible. One way to do this is to require that all contractors get a bond.
A typical surety bond contract contains three different parties:
1) The Obligee – this is the person (usually the owner) that gets paid if someone else (like the general contractor) doesn’t do what they said they’d do;
2) The Principal – this is the person who made the commitment (e.g., the general contractor or a small business subcontractor); and
3) The Commercial Surety – this is the person that will pay the obligee because they assured the obligee that the principal will perform the job as they said they would (FYI, most sureties are large insurance companies).
Interesting side note – European contracts are issued by banks and are called “Bank Guarantees” in English and “Caution” in French. These fidelity bond agreements pay money to the limit of the guaranty in the event of the default of the Principal/General Contractor.
Back to the US – the commercial surety enters into an agreement to support (i.e, they will pay), for the benefit of the Obligee, the legal guarantees (commitments) entered into by the principal (general contractor) if they do not live up to its assurances to the Obligee.
Of course, not all bonds are the same.
Next, the agreement is made that causes the obligee to deal with the principal, that is to show the trustworthiness of the principal as well as ensure that the obligations will be met (i.e., that they will perform according to the terms of the contract). Thus, the obligee gets some comfort with regard to the principal so that they can form a contract with the principal. That is, the guaranty from a surety assures an honest accounting by the principal, which in turn provides the owner that assurance needed to give the contract to the principal. It is this core understanding that has allowed many small businesses to acquire jobs that they otherwise would not qualify for. Although some feel that the charges the small business is required to pay, and the information may be required is onerous, these fidelity bonds protect the owner, which will only provide more work to bid on.
The principal is required to provide a bond and pays a price (on an annual basis) to get the sureties fiscal backing so that they can get this guarantee. The principal is willing to pay for the guarantee because then they can get the contract and start some profit-paying work.
So, what happens if the principal cannot perform? Well, that circumstance, the company will nominate an investigator (either an insurance agent or a local attorney) to assess the situation and determine if there is a claim with validity (sometimes, the obligee complains, but that complaint is usually without merit). If the claim is determined to be valid, then it’s the surety’s duty to pay it (or find someone to perform the remainder of the contract). They then looks to get reimbursed by the principal in an amount that they remitted on the case and any lawful charges sustained.
So, what happens if there is a default by the principal and the surety is also insolvent? In those cases, the guarantee is worthless. That’s why the guarantee is normally an insurance company. That company will have a large net balance sheet with audited financials. These companies are also subject to regulatory requirements and many are publicly-traded companies.
The four basic types of Surety Bonds:
- Bid: This makes sure that the bidder on a contract will: 1) take part in the contract and 2) provide the required agreements, including bonds (i.e., payment and performance) if they win the contract, and 3) will perform pursuant to the terms of the agreement.
- Payment: This makes sure that suppliers and subcontractors get paid for their work that they will perform.
- Performance: This makes sure that the contract will be finished pursuant to the terms and conditions of the commitment/contract.
- Ancillary: This makes sure that the terms that are essential to the commitment/contract, but those not directly related to performance, are observed.
Also, jobs with the Federal Government over a certain monetary threshold require a bond from a commercial surety. The requirement is known as the Miller Act and most local governments have passed similar laws (called Little Miller Acts) that also require a commercial surety guarantee for that work.
License and Permit Bonds
Permit bonds, and license bonds, are generally a requirement forced upon you by the government, whether it be the Feds, your State or a local municipality. Generally, these types of bonds are needed before you can get issued the required license in the locale. A permit bond is a subset of a license bond. It allows you to operate in the business activity in that area.
The rationale behind License Bonds and Permit Bonds are that they serve as a guarantee that the company will perform according to the general rules and requirements of that professions. The government wants these bonds so that their constituents (i.e., taxpayers) will be comfortable in hiring companies to do work that is in accordance with state laws, statutes, local ordinance or other rules and regulations applicable to the small business.
Some examples include:
- Tax bond. This bond guarantees that the small business owner will remit to the government the required taxes (such as sales taxes). The surety company provides a guaranty to the government itself that the taxes will be paid.
- Contractor’s license bond. This bond is provided by a surety so that a small business can get a license to work in that field. These license bonds are very prevalent in California and Oregon and contractor’s have to get them so that they can work in areas that require them.
- Customs bond. A customs bond is for those business that import goods into the United States. The bid parts of a customs bonds centers around the proper tax payments, such as import duties.
- Broker’s bond. A broker’s bond is for those small businesses that work in the real property area, such as mortgage originators, real estate insurance companies and title agencies.
- Janitorial Services Bond. This type of specialized bond is for businesses that engage in janitorial services. Click here to start the application process today.
- ERISA bond. An ERISA bond is for the pension industry. Specifically, it provides assurance for employee benefit plans and that those plans provide the required information to beneficiaries and that the fiduciaries abide by their duties. We provide ERISA Bonds, go here to get one.
- Motor vehicle dealer bond. These are very common in that motor vehicle bonds are required for both new and used car dealers. Given that used car dealers are common, these bonds are needed to make sure that these small business owners meet the required government requirements.
- Health spa bond. Health spas, given their nature, are required to get a bond so that they can meet the requirements set up for businesses that deal directly with persons (and their health).
- Money Transmitter bond. Western Union, and the related businesses, need bonds to ensure that they transmit funds properly, pay all taxes, etc.
- Environmental protection bond (also known as a reclamation bond). When doing environmental work, especially given its health hazards, small business contractors are required to be bonded.
A notary public is someone that is license with the state. Their main role is to serve the general public as a witness for important documents, such as Wills, Deeds and other legal agreements. In many states (32 at last count) notaries are required to be licensed and some require a course or an exam (in Kansas and Delaware the requirements only apply to electronic notarizations). Many states require that notaries be bonded. For example, the State of Florida requires that a notary post a bond in the amount of $7,500. So, if you need a Notary Bond, go here.
Lost Title/Instrument (Trust Deed) Bonds
When an official document is lost, a Lost Title Bond is needed so that the state can properly pass title. We provide these bonds, so please go here to start the bond application process.
Court Bonds – Fiduciary and Judicial
Court bonds are regularly required by courts in the course of cases. These bonds are broken down into two main categories: 1) fiduciary bonds; and 2) judicial bonds. Fiduciary bonds are generally used in the probate court area, including for executors of wills and guardianship proceedings. They guaranty that those fiduciaries will perform their duties according to the rules of court. Judicial bonds (which include supersedeas, replevin, attachment, appeal, injunction, and mechanic’s lien bonds) are used in the litigation area. These types of bonds are posted by the different parties to a lawsuit during the litigation process.
We provide Probate and Court Bonds in all states.
Public Official Bonds
These bonds guarantee the faithful performance and honesty of public officials. Given their position of trust as a public figure, they are required to post a public official’s bond. People that typically post a public official bond are: county treasurers, judges, notaries, town clerks, county commissioners, and police officers.
Given the complexity in subdivision development, these types of bonds are generally somewhat more difficult to get. We work with a specialized provider that works in these types of risks. Click here to get a subdivision bond.
Fidelity Bonds – Employee Dishonesty Bonds
Many people refer to fidelity bonds as employee dishonesty bonds. These bonds are generally purchased by private companies to protect them against their own employee’s dishonest acts. Unlike most other types of bonds, these bonds are more similar to traditional insurance coverage.
Bail Bonds (Penal Bonds)
Bail bonds are probably the most common type of surety bond. Nearly everyone is familiar with the concept as someone they know (or someone they’ve seen on TV) has had to get a bail bond. These bonds are posted by a surety so that they person can get out of jail. They guaranty that the person will show up for their required court date(s).
What Type of Bond is Right for You?
So, which type of surety guarantee is right for your small business? Well, that can be difficult. There are over 25,000 different types of these things and they can be tailored in a myriad of ways. You may be required to provide one or more of the above types of bonds. For example, for many general contracts here in America, they are required to provide a bid bond when they are simply trying to get the work. This need this bid bond to guarantee that if they are awarded the contract that they can perform pursuant to the terms of that agreement (and so that the bidding process does not have to be re-opened). Next, when the bidder is awarded the project, they will pay for a Performance bond from the bond company/corporate surety. Many times a payment bond is also required by the general contractor (which, in turn, protects the vendors and subcontractors in their payment).
The type of bond that you need will generally fall into a broad category (bid, performance, payment, surety, etc.). One of the things that we see are that the contracts that are written have certain wrinkles. Thus, the exact bond that is needed is generally tailored to the specific contract. We also work with multiple sureties and match their guarantees with the contract being bonded.
How do you Get a Surety Bond?
Sometimes, it can be super-simple. You will only simply have to fill out our form online and we can get you qualified in a couple of hours. For larger jobs (over $350,000) certain other information may be required. You may be required to provide your financial statements, the contract for the job and the bond guarantee requirements. In some cases, you may be required to post collateral in order to guarantee a part of the job. We work diligently with you to discover the best surety company for your business and help you with your presentation to reduce the burden on what is needed (for example, we try to never get a bond for someone that requires collateral as a condition of the guarantee). Further, we try and use different sureties so that your bond capacity can be greater than using a single business. We keep you eligible for the best programs and help you with your accounting so that it is more easily digested by the underwriters.
A good resource is the General Contractors of America web site, which can give you some details on what is expected for a contractor of your size, industry and location.
What Happens if You Have Claim on your Surety Guaranty?
There are times, especially if you are around this surety business long enough, that you will have a claim filed on your bond. These claims can be obvious, such as when someone is unhappy with the building and mediation of the dispute is unsuccessful. Other times the claim can come out of the blue. This happens many times when a payment bond claim is made. A general contractor usually has little to no idea if a subcontractor has not paid one of their subcontractors or material suppliers. This is especially true if the general contractor has already paid their direct subcontractor. Thus, they get a surety claim made and have to pay twice for the exact same work or materials. One tip: if you are a general contractor, require a payment bond from your subs.
Once a claim is filed, the guaranty company will assign a claims adjuster. Most good sureties have attorneys that they use for this; we prefer sureties that utilize attorneys for their claims. Once the attorney gets the claim, they review it for the merits of the claim. If the claim does not have merit, then the attorney will decide to fight the claim. If the claim does have merit, then a decision has to be made whether to pay the claim or provide performance (if available) for that claim. The surety company will generally choose performance as that is the least costly solution. Finally, the surety will look to the contractor that was bonded to pay for the defense of the claim or any damages caused by the claim.
How much does a Bond Cost?
The rates you will pay can vary widely. For smaller contracts ($350,000 or less), the cost is generally around 3%. For larger construction agreements, the cost you will pay is usually based on a sliding scale. In general, the rate varies from 0.75% to 3.0%. There are certain instances, such as sub-prime or bad credit, where additional fees are imposed. We help you balance out whether to pay the fee or post additional collateral to reduce the rate. This is a decision based upon your specific business needs and we help you decide the best fiscal decision (for example, the charges the small, fast-growing business will pay a greater rate instead of posting collateral as that collateral is desperately needed to finance the growth).
Your character goes a long way toward determining your rate. For larger projects, a surety wants to know that they will not have a claim or, if they do have a claim, it will be minimal, or at the very least the contractor has the wherewithal to pay for the claim. That is where character comes into play. Companies that have a strong financial footing are one thing. Those companies that have a strong financial footing as well as a reputation for integrity are those that sureties truly enjoy underwriting. Thus, those companies end up having best in class rates.
So, please give us a call and we can help you decide that rate you are eligible for (that is, what program is the best one for your small business).
Swiftbonds is a world-class bond provider. We focus solely on commercial bonds, license bonds and permit bonds, and individual bonds (also known as fidelity bonds), or other types of miscellaneous bonds or fidelity agreements, like individual notary bonds. Unfortunately, we do not do bail bonds for anybody in jail. Given our focus on contract and commercial bonds, we believe that we can better serve our customers in finding the RIGHT deal for their small business.
We are proud in saying that we are the Experts in providing the right bond for the absolutely best price.
We hope that this information has been useful. If you like to learn more, please go here to learn about a Performance Bond.
4901 W. 136th Street #250