Surety Bonds
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Surety Bonds
A surety bond is a legally binding agreement in which one party (the principal) promises to fulfill certain obligations, and a second party (the surety) guarantees that obligation to a third party (the obligee). If the principal fails to meet the terms of the agreement, the surety may be required to compensate the obligee, and the principal must reimburse the surety.
Surety bonds are sometimes called performance bonds, payment bonds, or contract bonds, depending on their use. They are different from traditional insurance in that they protect the obligee’s interests, not the principal’s
How a Surety Bond Works
In a typical surety bond arrangement, three parties are involved:
Principal — the business or individual that must fulfill an obligation (for example, contractors in a construction project)
Obligee — the party requiring the bond (for example, a project owner, municipality, or regulatory agency)
Surety — the bonding company that guarantees performance or payment if the principal fails to meet its obligations.
If the principal fails to deliver, perform, or pay as required, the surety may have to respond to claims, then seek reimbursement from the principal under an indemnity agreement.
Types of Surety Bonds
Surety bonds are broadly grouped into two categories: contract bonds and commercial (or non-contract) bonds.
Contract Surety Bonds
These are often required on construction or public projects to guarantee that work will be completed and subcontractors and suppliers will be paid. The main types include:
Bid bond — assures the obligee that the bidder will enter into the contract and provide required bonds if awarded the job
Performance bond — guarantees that work will be performed in accordance with contract terms
Payment bond — ensures the contractor will pay laborers, subcontractors, and suppliers
Maintenance bond — also called a warranty bond; required to protect against defects in workmanship or materials for a specified period after project completion
Commercial (Non-Contract) Surety Bonds
These bonds are required by law, regulation, or contract, but are not tied directly to construction projects. Examples include:
License and permit bonds (for businesses required to secure a license)
Court or judicial bonds (to guarantee payment or performance in legal proceedings)
Public official bonds (for elected or appointed officials)
Service bonds, supply bonds, and miscellaneous commercial bonds
When You Need a Surety Bond
Public construction contracts often require contract surety bonds. In many jurisdictions, bids exceeding a threshold must be accompanied by bid, performance, and payment bonds.
Private owners or developers may require bonds for large, risky projects.
Regulatory or licensing authorities may require commercial surety bonds to operate legally in certain industries.
Bond Underwriting & Cost
Obtaining a bond involves underwriting, in which the surety evaluates the principal’s financial strength, performance history, credit, and reputation.
Premiums vary by bond type, bond amount, and the perceived risk of the principal. High-performing contractors with strong financials typically receive lower rates.
It is also common to prequalify for bonding capacity before bidding on projects to ensure you can meet bond requirements.
The Jines Group can help you evaluate bonding requirements, determine which types of bonds you need, and navigate the underwriting process. Let us help you secure the surety support your business needs.
Surety Bonds
A surety bond is a legally binding agreement in which one party (the principal) promises to fulfill certain obligations, and a second party (the surety) guarantees that obligation to a third party (the obligee). If the principal fails to meet the terms of the agreement, the surety may be required to compensate the obligee, and the principal must reimburse the surety.
Surety bonds are sometimes called performance bonds, payment bonds, or contract bonds, depending on their use. They are different from traditional insurance in that they protect the obligee’s interests, not the principal’s
How a Surety Bond Works
In a typical surety bond arrangement, three parties are involved:
Principal — the business or individual that must fulfill an obligation (for example, contractors in a construction project)
Obligee — the party requiring the bond (for example, a project owner, municipality, or regulatory agency)
Surety — the bonding company that guarantees performance or payment if the principal fails to meet its obligations.
If the principal fails to deliver, perform, or pay as required, the surety may have to respond to claims, then seek reimbursement from the principal under an indemnity agreement.
Types of Surety Bonds
Surety bonds are broadly grouped into two categories: contract bonds and commercial (or non-contract) bonds.
Contract Surety Bonds
These are often required on construction or public projects to guarantee that work will be completed and subcontractors and suppliers will be paid. The main types include:
Bid bond — assures the obligee that the bidder will enter into the contract and provide required bonds if awarded the job
Performance bond — guarantees that work will be performed in accordance with contract terms
Payment bond — ensures the contractor will pay laborers, subcontractors, and suppliers
Maintenance bond — also called a warranty bond; required to protect against defects in workmanship or materials for a specified period after project completion
Commercial (Non-Contract) Surety Bonds
These bonds are required by law, regulation, or contract, but are not tied directly to construction projects. Examples include:
License and permit bonds (for businesses required to secure a license)
Court or judicial bonds (to guarantee payment or performance in legal proceedings)
Public official bonds (for elected or appointed officials)
Service bonds, supply bonds, and miscellaneous commercial bonds
When You Need a Surety Bond
Public construction contracts often require contract surety bonds. In many jurisdictions, bids exceeding a threshold must be accompanied by bid, performance, and payment bonds.
Private owners or developers may require bonds for large, risky projects.
Regulatory or licensing authorities may require commercial surety bonds to operate legally in certain industries.
Bond Underwriting & Cost
Obtaining a bond involves underwriting, in which the surety evaluates the principal’s financial strength, performance history, credit, and reputation.
Premiums vary by bond type, bond amount, and the perceived risk of the principal. High-performing contractors with strong financials typically receive lower rates.
It is also common to prequalify for bonding capacity before bidding on projects to ensure you can meet bond requirements.
The Jines Group can help you evaluate bonding requirements, determine which types of bonds you need, and navigate the underwriting process. Let us help you secure the surety support your business needs.
