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Business Insurance

Surety Bonds

What is a Surety Bond?

A surety bond is a written agreement whereby the "Surety" promises to pay the "Obligee" if the "Principal" fails to meet certain obligations as outlined in the bond agreement.

Who are the parties to a Surety Bond?

  • Principal - the party who is performing the contractual obligation
  • Obligee - the party to whom the Principal is obligated; the party who is protected by the surety bond
  • Surety - the bonding company who makes the promise to pay the Obligee under the
    bond agreement

License or Permit Bonds

These are bonds which are required as a prerequisite to obtaining a license or permit for a particular profession, occupation or activity. They can be required by the state or some local municipality or regulatory body. To understand a specific license or permit bond obligation, it is necessary to review the statute, ordinance or regulation from which the bond originated, along with the language of the bond form itself. Generally, a License or Permit Bond requires that the principal comply with the laws, statutes, ordinances and regulations pertaining to that particular license or permit. This bond is usually written for a one-year term.

Contract Surety Bonds for Your Business

Contract Surety Bonds are designed to guarantee the performance of obligations under a contract. These bonds guarantee the Obligee (the entity requiring you to supply the bond) that the Principal (your company) will perform according to the terms of a written contract. Contract bonds protect a project owner by guaranteeing a contractor's performance and payment for labor and materials. Because the contractor must meet the surety company's pre-qualification standards, lenders are also indirectly assured that the project will proceed in accordance with the terms of the contract.

Performance Bonds are a type of contract surety bond that guarantee performance of the terms of a contract. These bonds frequently incorporate payment bond (labor and materials) and maintenance bond liability. This protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.

Payment Bonds are a type of contract surety bond that guarantee payment of the contractor's obligation under the contract for subcontractors, laborers, and materials suppliers associated with the project. Since liens may not be placed on public jobs, the payment bond may be the only protection for those supplying labor or materials to a public job.

Bid Bonds guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds. These bonds are used by owners to pre-qualify contractors submitting proposals on contracts. These bonds provide financial assurance that the bid has been submitted in good faith and that the contractor will enter into a contract at the price bid.

Surety Bond versus Insurance Policy: Because a surety bond is not an insurance policy but a financial guarantee, the application process is different and often more involved than for an insurance policy. Should the bonding company have to respond financially on your behalf under this type of bond, they would come back to you for financial satisfaction, which is why an indemnification agreement is part of the application.

The Application Process: The bonding company will want to perform a thorough underwriting of your company; background and experience, references, current work on-hand, and financial standing. Especially for projects over $100,000; establishing a bonding line of credit is not unlike applying for any other type of credit, and the entire process can take from four to six weeks to complete.

Moody Insurance Worldwide is ready to handle all your Surety Bonding needs. Contact us at (301) 417-0001 or by email at customerservice@moodyinsurance.com.

 



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