Contract Surety Bonds
A surety bond is a written agreement where one party, the surety, obligates
itself to a second party, the obligee, to answer for the default of a third
party, the principal.
Contract Surety Bonds provide financial security and construction
assurance on building and construction projects by assuring the project owner
(obligee) that the contractor (principal) is qualified to perform the work and
will pay
certain subcontractors, laborers, and material suppliers.
Contract surety bonds include:
- bid bonds, which provide 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.
- performance bonds, which protect the owner from financial
loss should the contractor fail to perform the contract in accordance with
its terms and conditions.
- payment bonds, which guarantee that the contractor will pay
certain subcontractors, laborers, and material suppliers associated with
the project.
- maintenance bonds, which normally guarantee against
defective workmanship or materials for a specified period.
- subdivision bonds, which guarantee to a city, county, or
state that the principal will finance and construct certain improvements
such as street, sidewalks, curbs, gutters, sewer, and drainage system
How are surety bonds obtained?
Surety bonds are issued through surety bond producers, also known as agents
and brokers, who are knowledgeable about the surety and construction industries.
Surety bond producers usually work in agencies that specialize in surety bonds
or in insurance agencies that have a sub-specialty in surety bonds.
The professional surety bond producer usually maintains a business
relationship with several surety companies, which enables the producer to match
a contractor with an appropriate surety company. A good surety company and
surety bond producer will help a contractor maintain and increase its surety
capacity. Names of producers specializing in surety bonds can be obtained from
the National Association
of Surety Bond Producers (NASBP). NASBP members adhere to professional
standards that demonstrate professionalism, expertise, and innovation in surety
bonding.
NASBP is the international organization of professional surety bond producers
and brokers. NASBP represents over 5,000 personnel who specialize in surety
bonding, provide performance and payment bonds for the construction industry,
and issue other types of surety bonds for guaranteeing performance, such as
license and permit bonds. NASBP's mission is to strengthen professionalism,
expertise, and innovation in surety and to advocate its use worldwide.
What is a surety company?
Most large property and casualty insurance companies have surety departments.
In addition, there are some companies for which surety bonds make up all or most
of their business. In either case, in order for a company to write a surety bond
in the United States, it must be licensed by the insurance department of one or
more states. Although there are some exceptions, generally a surety company must
be licensed by the state in which it is doing business or by the state where the
obligation guaranteed by the bond is being performed.
Surety companies are represented by The
Surety & Fidelity Association of America (SFAA), a District of Columbia non-profit
corporation whose members are engaged in the business of suretyship. Member
companies collectively write the majority of surety and fidelity bonds in the
United States. SFAA is licensed as a rating or advisory organization in all
states, as well as in the District of Columbia and Puerto Rico, and it has been
designated by all state insurance departments except Texas as a statistical
agent for the reporting of fidelity and surety experience. SFAA represents its
member companies in matters of common interest before various federal, state and
local government agencies.
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