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Bonds

A surety bond is issued by a third party to support an agreement between two parties. The primary purpose of the Surety bond is to provide financial protection against a contractual or a regulatory violation.

Each surety bond must be tailored to meet specific needs. Our team of specialists combines the experience, industry relationships, and innovation necessary to create effective solutions to your bonding needs. We’re ready to learn your story and provide expert service and support through the process and beyond. Our priority is making sure you have a surety program in place that allow your business to meet your goals.

Resources

All Industries have a jargon or special words or expressions that are used by a particular profession or group and are difficult for others to understand. The surety industry is no exception. Below are some common industry terms and their meanings.

Glossary

Accepted By – A place where a signature may be applied by the project owner or Construction Manager to show acceptance of the bond form – most often found on bond riders that amend the terms of a bond. 

Administrator – A fiduciary appointed by a probate court to manage or distribute the assets of an estate of a person who died without leaving a will.

Advance Payment Bond – Guarantees repayment by the principal of monies advanced in connection with a construction or supply bond or other type of contract.

Agent – A person licensed by a state to conduct insurance sales business and who has been appointed by an insurance company to represent it.

Annual Bond – One written to cover contractors or bids awarded, or submitted during an annual period, or for a period terminating within a fiscal year.

Application – A questionnaire, which must be completed when required, by an applicant for a bond. It gives the company information about the applicant and contains his/her agreement to indemnify the surety in the event of loss, as well as his/her promise to pay the premium.

Attest – To bear witness, to be true or genuine; to certify.

Attorney in Fact – The holder of a Power of Attorney granted by a surety company empowering the execution of a surety bond on behalf of the company. An Attorney In Fact for an insurance company is sometimes called an “Agent.”

Backlog – The out-of-pocket expense remaining on the work currently under contract. Also called Cost to Complete. This is subtracted from the principal’s aggregate program limits to determine current bonding capacity

Bad Faith – Design to deceive another; conscious wrongdoing or lack of appropriate investigation / action.

Bankruptcy – The state of being unable to pay debts as they are or come due as regulated by bankruptcy laws. Straight bankruptcy (chapter 9) deals with the condition of insolvency in which the court provides for assets to be distributed to creditors. Debtor rehabilitation provisions (under chapter 11 and 13) of the Bankruptcy Act provide for rehabilitation and reorganization in which creditors look to future earnings of the bankrupt to satisfy claims. Bankruptcy is a legally declared inability or impairment of ability of an individual or organization to pay their creditors. A declared state of bankruptcy can be requested by creditors in an effort to recoup a portion of what they are owed. However, in the overwhelming majority of cases, the bankruptcy is initiated by the bankrupt individual or organization.

Bankruptcy Code – There are several types of Bankruptcy that may be filed.

  • Chapter 7 – Provides for “liquidation” (sale) of the debtor’s nonexempt property and the distribution of the proceeds to creditors.
  • Chapter 9 – Provides for reorganization of municipalities and other public bodies.
  • Chapter 11 – Provides for reorganization of corporations and partnerships with payments to creditors over a stated time. Individuals and sole proprietors may also file under this Chapter.
  • Chapter 12 – Provides for adjustment of debts of “family Farmer” or “family fisherman” as defined in the Code.
  • Chapter 13 – Provides for the adjustment of debts of individuals over time, usually three to five years.
  • Chapter 15 – Provides for adjustment of debts in cross-border cases.

Bid Bond – Given by a bidder for a supply or construction contract to guarantee that the bidder, if awarded the contract within the time stipulated, will enter into the contract and furnish the prescribed performance bond. Default will ordinarily result in liability for the difference between the amount of the principal’s bid and the bid of the next low bidder who can qualify for the contract. In any event, however, the liability of the surety is limited to the bid bond penalty.

Bid Spread – The difference in the bid price between the first, second and third lowest bidders.

Bona Fide – In good faith; without deceit or fraud; sincerely; real; genuine.

Bond – Generally speaking, it is an agreement whereby one party, called the surety, obligates itself to a second party, called the obligee, to answer for the default of a third party, called the principal.

Bond Amount – Also know as a Bonding Penalty. It is the dollar amount for which a bond is issued.

Bond Penalty – The maximum amount for which a surety company may normally be held liable under the bond.

Bond Rider – A form attached to the bond to add to, alter, or vary its provisions. Sometimes called a rider. Also known as an Endorsement.

Bonding Capacity – The limit of Surety Credit extended to a principal. Determined by the surety’s review of financial information that includes the Working Capital and Net Worth of the principal.

Bonding Company – Business authorized to issue bonds, usually an insurance company. Normally equal to the Bond Amount

Breach – The breaking or violation of a law, obligation, contract or standard, either by commission or omission.

Broker – Party representing a client to an insurance company or surety. The Broker/Agent must be licensed. In addition, they must have an agreement with each company they deal with.

Building Codes – Rules and regulations of governmental bodies defining standards that constriction in that jurisdiction must meet.

Buy/Sell Agreement – An agreement between principals in a Partnership, LLC, or Closed Corporation that specifies the buy-out price of each Principal’s share of the business.

By Laws – An organization’s rules and regulations governing its members and regulating its affairs.

Cancellation Clause – A clause in a bond which permits the surety to terminate its future liability by serving written notice upon the obligee.

Certified Copy – Reproduction of a document that the authority, having custody of the original, signs and attests that it is a true, genuine, and authentic copy.

Character – Principal’s personal traits (e.g., moral integrity, conscience) which surety uses to evaluate risks.

Chattel – Tangible personal property, not real estate.

Claim – One Party’s demand for something believed due from another party.

Co Surety – One of a group of sureties directly participating in a bond with obligations joint and several.

Collateral – Anything of value pledged with the surety to secure it against loss by reason of default of the principal.

Commission – Money paid to an agent or broker for placing business with a surety or insurance company.

Committee – One appointed by a court to manage the estate of a person who has been declared incompetent. Also known as conservator or a curator.

Completion Bond – One covering performance of a construction project that names as an obligee a lender or similar party in a position to invoke the performance features of the bond for its benefit without an obligation to provide funds or to complete.

Condition – The technical name of one of the four parts of a bond. The condition is not a qualification of coverage as with an insurance policy but is the essence of the guarantee.

Consent of Surety – Many contracts require, and good practice dictates, that a surety’s consent be obtained in connection with final payment of retainage under a bonded contract, or any time that payment is being made in the face of potential claims or defaults. In this manner, the surety cannot be heard to later complain that contract balances, to which it looks for security, were released prematurely.

Contract Bond – A guarantee of the faithful performance of a construction contract and usually the payment of all labor and material bills related to it. In those situations where two bonds are required – one to cover performance and the other to cover payment of labor and materials – the former is known as a performance bond, and the latter as a payment bond.

Contract Price – The whole sum of money which passes from the owner to contractor when final settlement is made between the two under the contract, the basis for the premium charge on most types of construction and supply contract bonds.

Corporate Equity – Typically referred to as shareholders’ equity (or owners’ equity for privately held companies), represents the amount of money that would be returned to a company’s shareholders if all the assets were liquidated and all of the company’s debt was paid off in the case of liquidation. Essentially, the value of all assets, minus the total of all liabilities. Also called Net Worth

Corporate Surety – A corporation licensed under various insurance laws, which under its charter, has legal power to act as surety for others.

Cost to Complete – The out-of-pocket expense remaining on the work currently under contract. Also called Backlog. This is subtracted from the principal’s aggregate program limits to determine current bonding capacity

Counter Replevin – Defendant’s bond to recover property replevied. A Court Bond guaranteeing to redeliver property to a plaintiff and to comply with the court’s decisions; upon giving bond the defendant regains possession of contested property.

Countersignature – A signature of a licensed domiciled agent or representative required by the laws of some states to validate the bond.

Court Bonds – A general term for all bonds that are required by a state, federal or local court.

Cumulative Liability – The aggregate amount of two or more bonds in behalf of the same principal (or in the case of fidelity or blanket bonds, in favor of the same obligee) filed in succession, where the succeeding bond does not extinguish the liability under the prior bond or the liability of the surety is the penalty of the bond times the number of years in force.

Current Assets – All the assets of a company that are expected to be sold or used as a result of standard business operations over the next year.

Current liabilities – A company’s debts or obligations that are due to be paid to creditors within one year.

Custom Bonds – These bonds guarantee the payment of import duties and taxes, and compliance with regulations governing the entry of merchandise from foreign countries into the United States.

Default – The omission or failure to perform contractual duty.

Department of Treasury Circular 570 – Also called a T-List, provides a list of approved surety companies that have a Certificate of Authority from the U.S. Department of Treasury. Updated annually in July.

Design/Build – A system in which a single entity providing all the services necessary to design and construct the project based upon the requirements established by the owner.

Discharge – Release or removal of an obligation or liability. Court bonds for administrator, executor, guardian or conservator require a discharge to release the obligation of the bond.

Disclosure – Act of making known something previously unknown, or known to only a few.

Discovery Period – Under certain bonds and policies, a provision is made to give the insured a period of time after the cancellation of a contract in which to discover whether a loss was sustained that would have been recoverable had the contract remained in force. This period usually varies from six months to three years. The period may be determined by statute; in certain bonds, it is of indefinite duration because of statutory requirement.

Earned Premium – The premium amount which would compensate the surety for the protection furnished for the expired portion of the term of the bond.

Effective Date – The date from which bond coverage is provided. May not be prior to the contract date.

Employee Retirement Income Security Act (ERISA) – Federal legislation (U.S. Code Title 29, Chapter 18, associated Internal Revenue Code and miscellaneous provisions) adopted in 1974 that preempts state regulation of workers’ medical and pension benefits. It imposes a fiduciary responsibility on persons who administer, supervise, and manage private pension plans. It regulates plan funding, participation, vesting, termination, disclosure, and federal tax treatment. Under ERISA, an insurance program has been established to guarantee that employees receive their pension benefits if a pension plan is terminated.

Encumbrance – A legal term for a documented claim against property, such as a mortgage.

Endorsement – A form attached to the bond to add to, alter, or vary its provisions. Sometimes called a Bond Rider.

Enjoin – To prohibit of forbid by legal action.

Equity – Fairness; equal treatment. State laws require insurance rates not to discriminate among consumers except according to valid underwriting criteria. Equity is accomplished by setting premium rates according to the expected losses for a group of similar insureds. Thus, all insureds with the same loss characteristics are classified together for underwriting and rating purposes.

ERISA Bond – A bond required by ERISA for all employees’ benefits plans covered by ERISA. The bond/policy is a Fidelity Policy and protects the monies of the Plan from theft. The Employee Benefit Plan is the named insured. ERISA requires that the bond be a minimum of 10% of the assets of the Plan with the maximum of $500.000.

Escrow – An arrangement for a neutral third person (escrow agent funds control, or depositary) to hold funds paid by a contracting party until a specified event, when the funds are released to the other contracting party.

Exclusion – A provision in a bond referring to perils or property not covered.

Executor – An individual who is appointed or specified in a will to execute its provisions.

Expiration – The date upon which a bond will cease to provide coverage unless previously cancelled.

Exposure – The extent of exposure to loss, as measured by an exposure base, such as Bond Penalty or Contract Price.

Facultative Reinsurance – A reinsurance arrangement by which individual risks are offered by the ceding insurer to a reinsurer, who has the right (faculty) to accept or reject each risk.

Fidelity Bond – A bond covering an employer for a loss resulting from an employee’s dishonest acts.

Fiduciary Bond – A type of judicial bond that guarantees the faithful performance of a fiduciary (e.g., an executor, guardian, or a trustee) as directed by the court.

Financial Guarantee Bond – Any judicial bond that guarantees the payment of money, such as an appeal bond, bail bond, plaintiff review bond, or sales tax bond.

Financial Statement – A written report summarizing the financial status of an organization for a stated period of time. It describes the organization’s activities and resulting profit or loss, the flow of resources, and the distribution or retention of profits. May be prepared internally or externally by a CPA. CPA Financials are given the highest level of credibility by a surety company with the level of reporting (Compiled, Reviewed, Audited) impacting the rate structure available to the organization.

Fixed Penalty Bond – A bond penalty which is expressed in terms of stated and definite sum of money.

Forfeiture Bond – A bond where the full penalty is payable upon breach of condition regardless of the amount of loss or damage. U.S. Customs bonds are one such example.

Forgery – The making or alteration of a document with a fraudulent intent; counterfeiting or signing a false signature to a negotiable instrument.

GAAP – Generally Accepted Accounting Principles. Standards that encompass the details, complexities, and legalities of business and corporate accounting. The Financial Accounting Standards Board (FASB) uses GAAP as the foundation for its comprehensive set of approved accounting methods and practices 

Garnishment – Legal attachment and distribution of property to satisfy a debt.

General Indemnity Agreement (GIA) – An indemnity agreement is a contract entered into between indemnitor and surety in which indemnitor secures surety against loss.

Guarantor – Party undertaking that another party will pay or will perform; one who becomes secondarily liable for another’s debt or performance; e.g., a surety is a guarantor.

Guardian – Court-appointed fiduciary caring for a minor or an incompetent person and administering an estate on his or her behalf.

Indefinite Term – Refers to a surety bond that has no expiration date.

Indemnitor – A party entering into an agreement with a surety where they assume the principal’s obligation should the bond be in default. May include personal as well as corporate entities. Indemnitor(s) reimburse the surety for amounts the surety pays out due to a principal’s default and subsequent legal obligation due to a successful bond claim. 

Indemnity – Compensation for an incurred injury, loss or damage.

Indemnity Agreement – An agreement to restore a party to its original financial position following an incurred loss or injury.

Injunction – A court order that restricts or prohibits an act, either for a limited time or permanently.

Instrument – Written document, formal or legal: e.g contract, deed, will, bond, etc.

Irrevocable Letter of Credit (ILOC) – A financial instrument issued by a bank that guarantees payment of a customer’s drafts up to a stated amount. An ILOC confers the bank’s credit upon the holder. LOCs can be either “revolving” (periodically renewed for a specified amount) or “performance” (guaranteeing performance depending upon the beneficiary’s needs). Often used to provide collateral security to a surety in support of a bond.

Joint and Several Liability – Liability arising from a contract or from a tort that applies to the responsible persons either separately (severally) or in combination (jointly), at the injured person’s option. If a group of persons who default on an obligation or cause a loss are held jointly and severally liable either by terms of the contract or by operation of law, the claimant may sue either the group or any one member for the entire amount owed. This is a way to compensate an injured person if, for example, one or more liable persons are bankrupt or flee the jurisdiction.

Joint Venture – An association of two or more individuals or companies to engage in a limited business transaction. Profits and losses are usually shared according to an agreed formula.

Judicial Bonds – Bonds in judicial proceedings are filed by parties engaged in litigation to procure the benefits of relief afforded by law, such as Replevin, Attachments, Garnishments, etc. These bonds guarantee to the opposing party payment of the opposing party’s costs and damages in the event the Court’s judgment is in favor of that opposing party.

Labor and Material Bond – A bond that guarantees an owner (or general contractor) at a construction site that a contractor (or subcontractors) will pay for labor and material to be supplied. It protects the owner or contractor against liens from subcontractors, suppliers or laborers who are not paid. Also called a Payment Bond or Lien Bond.

Liability – Legally enforceable obligation.

License and Permit Bonds – License and Permit bonds take on many shapes and sizes. Most of these obligations are brought about by a statute of some kind for the protection of the general public. 

Lien – A claim or encumbrance on property by a creditor or a service provider pending payment of a debt; a creditor’s conditional interest in property taken as security for a debt, or any similar right by operation of law.

Lien Bond – A bond that guarantees an owner (or general contractor) at a construction site that a contractor (or subcontractors) will pay for labor and material to be supplied. It protects the owner or contractor against liens from subcontractors, suppliers or laborers who are not paid. Also called a Payment Bond or Labor and Material Bond.

Line of Credit – A prearranged borrowing limit established by an individual or organization with a financial institution.

Liquid – Assets capable of being readily converted into cash.

Liquidated Damages – specifies a predetermined amount of money that must be paid as damages for failure to perform under a contract. Usually linked to an agreed completion date.

Litigate – The attempt to resolve a dispute through proceedings in a court of law, i.e., a lawsuit.

Maintenance Bond – Unlike other bonds, a maintenance bond covers a specific period of time following the completion and acceptance of work performed guaranteeing the Workmanship and Materials of the Contractor. May be for the full Contract Price or some percentage of the Contract Price.

Maintenance Period – The period following the completion of the work by the contractor in which the contractor is obligated to correct any workmanship or Materials deficiencies. One year is standard and is included in the base bond premium. Additional charges apply if the period exceeds one year.

Mechanics Lien – Charge on real property in favor of parties supplying labor, materials, or professional services for a construction project, for value of labor, materials or professional services they supply; the lien prevents owner from obtaining clear title until the claim is settled. The right to file a lien is a legal right in the U.S.A and Canada, except as prohibited, as may be the case on public works.

Mechanics Lien Bond to Discharge – A lien against real estate may be filed for an amount claimed to be due for labor or materials furnished for the construction of a building or other improvement upon the property. Pending final determination of the owner’s liability, the owner may discharge the lien by giving bond conditioned for the payment of any amount that may be found due to claimant with interest and costs. The bond replaces the lien and still has to be discharged once the case is settled. Also known as a Release of Lien Bond

Miller Act – The Miller Act was enacted by Congress in 1935. This law replaced the Heard Act of 1894 which required contractors to obtain surety bonds on public works. The Miller Act requires federal government to require performance and payment bonds on its construction projects and extends the payment bond’s protection to certain subcontractors and suppliers. Most public bodies such as states, cities, and municipalities follow a bonding requirement like the Miller Act (called “the little Miller Act”).

Minimum Premium – The lowest premium amount for which a surety company will issue a bond.

Miscellaneous Bonds – A general term used to describe License and Permit Bonds.

Net Worth – Typically referred to as shareholders’ equity (or owners’ equity for privately held companies), represents the amount of money that would be returned to a company’s shareholders if all the assets were liquidated and all of the company’s debt was paid off in the case of liquidation. Essentially, the value of all assets, minus the total of all liabilities. Also called Corporate Equity

Obligee – The obligee is the entity (person, firm, corporation, government) protected by the surety bond against loss. The surety bond ‘runs to’ the obligee and the obligee has the ability to set the language of the surety bond.

Payment Bond  –  A bond that guarantees an owner (or general contractor) at a construction site that a contractor (or subcontractors) will pay for labor and material to be supplied. It protects the owner or contractor against liens from subcontractors, suppliers or laborers who are not paid. Also called a Labor and Material Bond or Lien Bond.

Performance Bond – A bond which promises that the terms of a contract applicable to the Principal/Contractor will be performed by the Principal/Contractor. It is not uncommon, though not entirely accurate, for this to be used a general term for any bond

Premium – The premium is the cost that you pay for the bond to be issued.

Principal – The principal is the entity obligated, with the surety, to the Obligee. The bond applicant.

Probate Bond – All types of bonds required of persons appointed to positions of trust by the court, such as Guardians, Executors, Administrators, Receivers, etc. These bonds guarantee the faithful performance of duties and an equitable accounting for property received and distributed.

Renewal – The renewal is the premium due for the bond for each additional term or license period.

Release of Lien Bond – A lien against real estate may be filed for an amount claimed to be due for labor or materials furnished for the construction of a building or other improvement upon the property. Pending final determination of the owner’s liability, the owner may discharge the lien by giving bond conditioned for the payment of any amount that may be found due to claimant with interest and costs. The bond replaces the lien and still has to be discharged once the case is settled. Also known as a Mechanics Lien Bond to Discharge

Subdivision Bonds – These are different from more common performance bonds used for construction projects. With subdivision bonds, the owner of the project provides bonds to the public agency to guarantee the installation of improvements that will ultimately be dedicated to the public but paid for by the owner/developer. Also known as Completion Bonds

Supply Bond – Bond that guarantees a contractor to furnish supplies or materials. No product installation forms part of the bond obligation. If there is installation – see Performance Bond.

Surety Bond – An insurance instrument that protects the revenue of the entity requiring the bond and offers no protection to the principal supplying the bond

Timeload Surcharge – An additional fee added to the base bond premium for projects that exceed twenty-four months as measured from the contract date. The fee is based on the number of months over 24 the project is scheduled to run.

Window – An opening or opportunity.

Work in Process Report – A WIP report is a detailed report that includes information about the financial performance and status of a construction project. Surety agencies use this report to monitor the progress of a contract and ascertain a client’s Backlog or Cost to Complete

Working Capital – is the capital that is essential for running the day-to-day operations of a business. Therefore, it is the difference between Current Liabilities and Current Assets

What is a surety bond?

A surety bond is a written agreement by one party (the surety) to back the promise made by another party (the principal) to the third party (the obligee). That promise may take the form of a construction contract or agreeing to adhering to local ordinances. The three parties involved in a bond include a Surety Company who provides the financial backing to support the bond, a Principal who is obligated to perform a task or follow a set of regulations, and an Obligee (the one requiring the bond).

What is the difference between a Surety Bond and an Insurance Policy?

There are several differences between a bond and an insurance policy even though both are issued by an insurance company. The most notable difference is that in the event of a claim, the surety expects to be reimbursed by the principal for monies paid out for a default while most insurance policies do not require repayment when a claim is settled. Another key difference is that the surety is more selective on who may qualify for a bond since support is dependent on an applicant’s financial strength and credit history. Finally, a surety bond provides financial protection to the entity requiring the bond and not to the party who is required to provide it.

What is a Bid Bond?

It provides financial protection to the Obligee (the party requiring the bond) in the event the low bidder is awarded the project but fails to enter into a contract for the work. The specific obligation of the surety under the bid bond (the form of resolution) appears in the bond form itself. One such obligation is to pay the Obligee the cost of having to repeat the bid process. However, other remedies do exist but in almost all cases, the surety’s liability is limited to the face value of the bond. This is usually a percentage (5% to 20%) of the total proposed bid amount. 

What is a Performance Bond?

A performance bond provides an obligee with a guarantee that, in the event of a contractor’s default, the surety can be called upon to complete, or caused to be completed, the contract undertaken at no additional expense to the obligee. A performance bond is usually issued in conjunction with a Payment Bond.

What is a Payment Bond?

A payment bond provides assurance that certain subcontractors and suppliers will be paid for labor and materials supplied to a project if the bonded principal fails to pay for labor or materials used in the project under contract.

What is a Maintenance/Warranty Bond?

A maintenance bond guarantees the project owner that any work defects found in the original construction will be repaired during the maintenance period. These may be issued independently or concurrently with a set of Performance and Payment bonds. Extended maintenance periods (more than 1 year) will increase the base bond expense.

Can I buy a bond to cover all my surety needs?

No. Bonds are specific to a particular obligation and may not be applied to others. In the case of a license or permit bond, the bond supports a specific set of rules or regulations. In the case of a set of Performance & Payment bonds, the bonds support a specific contract.

How much does a bond cost?

The cost of a bond is based on established rates filed by the surety along with the applicant’s financial stability and credit scores. Surety companies often have a minimum premium requirement that varies from $50 to $250 based on the type of bond issued. It is always a good idea to speak to a surety professional who will be able to negotiate a bond rate specific to your circumstances.

Does a Final Contract Price affect the bond premium?

Yes. When a bond is written to support a contract, the premium is based on the value of the contract at inception. It is not uncommon for changes to occur over the course of completing the contracted work that alter the final amount of the contract. If the final contract amount is greater than the original contract amount, this is called an Overrun and will result in some additional premium due to the surety based on the difference. If the project finished for less than originally contracted, this is called an Underrun and will result in some premium being returned to the principal. Any additional charges or refunds are waived if the amount falls below the surety’s minimum premium.

If the Bid Bond is only 5% of the of the total amount bid, why does the surety base their decision of support on the total project value?

While the bid bond provides some financial security to the project owner, it also serves as a pre-qualification of support by the surety if the contractor is awarded the job. Thus, the surety must consider the total estimate for the work being bid rather than just the percentage represented by the bid bond. If the surety is unwilling to consider support of a bond for the full contract amount, the surety will not approve the bid bond.

When are bond premiums due?

Bond premiums are due when the bonds are issued. Once a bond is issued and executed, it is binding on the surety and the principal. For bonds that have a renewal cycle, the first-year premium is considered “fully earned”. This means there is no refund of premium if the bond is cancelled prior to its first renewal. After the first renewal, most surety companies will provide a pro-rated refund based on the amount of time the bond is in effect following the renewal date.

Why does the surety include unbonded work when considering a bond request?

The surety looks for the total Cost-to-Complete (the out-of-pocket expense) a contractor has remaining on work under contract to better understand how leveraged a contractor’s balance sheet is compared to its contractual commitments. Whether the work is bonded or not, it represents a demand on the contractor’s resources and impacts the contractor’s ability to take on additional work.

What is a General Indemnity Agreement?

It is a contract between the surety company and the contractor that defines the obligations of the contractor to the surety in the event of a successful bond claim. The General Indemnity Agreement (GIA) obligates the named indemnitors to protect the surety from any loss or expense the surety suffers as a result of a bond claim. While the verbiage that comprises a GIA may change from surety company to surety company, they all have in common the contractor’s requirement to reimburse the surety for any loss or expense incurred on the contractor’s behalf.

Why do I have to sign a General Indemnity Agreement Personally?

A contractor agrees to indemnify (pay back) the surety company for any claim amounts or costs paid out on their behalf when executing a General indemnity Agreement. It is not uncommon that when a surety must pay out for a claim, the contractor’s company is in default and may be insolvent or bankrupt. The personal guarantee allows for the surety to collect if the remaining corporate assets are insufficient to meet the repayment obligation to the surety.

Why does my spouse have to sign if they have no ownership in the company?

A surety requires a spouse’s signature, even if he or she is not involved in the company, in order to prevent a transfer of assets to a spouse to that may be used to reimburse the surety. A spouse’s also helps keep company assets from being transferred to an ex-spouse in the event of a divorce when those assets were used to obtain surety support.

Why is a CPA Prepared Financial Statement Important?

The financial statement is the primary reference point for a surety to evaluate a contractor’s financial position, performance and any changes in that financial position which defines the level of surety credit that may be extended to the contractor. A construction focused CPA is best suited to advise on the changing tax codes and what accounting methods should be used to best represent the contractor’s operation. The level of financials issued (Compiled, Reviewed, Audited) will also add credibility to the values represented and qualify the contractor for lower rates than is possible with Tax Returns or In-House statements.

Why are pending bids counted against my overall aggregate bonding limit?

A primary function of the surety underwriter is to evaluate the total commitments a contractor has taken on or plans to take on when considering support. As a result, pending bids or proposals represent a possible commitment of company resources and must be considered when looking at the overall program limits. This is one reason reporting bid results to the surety should be a priority.

When the surety checks my credit will it lower my credit score?

While a surety regularly checks both corporate and personal credit, most surety companies do a “soft” credit check which does not adversely affect the credit score. 

What is Funds Control and why is the Surety requiring it as a condition of support?

This is a method used by surety companies to offset the possibility of claims against a payment bond. By employing a Funds Administrator to handle incoming payments and outgoing disbursements for a specific project, the likelihood of a claim against the Payment bond is mitigated. Thus, the surety may extend support when the contractor may not otherwise qualify for that support. The Funds Control companies sets up a separate bank account in the contractor’s name and often no one (with the exception of the project owner) knows it is in place.

Why do I have to post Collateral in order to obtain a bond?

Collateral is an asset that is pledged by a contractor to secure a surety bond when the project or contractor is considered high risk. The terms for the pledging of collateral are set forth in the individual surety’s collateral agreement. The amount of the collateral, usually in the form of an Irrevocable Letter of Credit (ILOC) issued by an approved banking institution, may be based on a percentage of the bond value or the full amount of the bond. It is common for the collateral to be held by the surety for the duration of the project and any claim notice period following project completion.

What determines my Bonding Capacity?

Surety credit, like bank loans, is based on financial stability and cashflow in addition to several other points of consideration. Basically, the more assets and liquidity compared to the overall liabilities, the better. A surety professional will help you maximize the amount of capacity extended by the surety.

How can I increase my Bonding Capacity?

Timely and periodic financial reporting is a key component to increasing bonding capacity. Besides showing the contractor is committed to being a good surety partner, it demonstrates strong administrative skills. Providing the financial updates allows the surety to see how project revenues are handled to positively increase the net worth of the contractor. A strong and/or increasing working capital and net worth allow for increased capacity. A surety professional will help you maximize the amount of capacity extended by the surety.

How do Extended Warranty Periods affect the availability of bonds?

The primary impact is to the bond premium. A surcharge is added to a bond premium if the warranty/maintenance period is greater than one year. An extended maintenance period may also prevent a surety from supporting the bond for a contractor. This may be due to a financial concern that the contractor may not be around to perform any corrections, but it could also be due to the specific surety company’s ability to issue long-term bonds. Most sureties will consider support for warranty periods of three or less and very few will consider them for up to 5 years. Periods more than 5 years are prohibitive in the standard surety market.

Are there programs to help small contractors obtain surety credit?

Yes, several in fact. Most surety companies have developed their own “starter” programs for new contractors to the surety industry. The U.S Small Business Administration has a Surety Bond Guarantee program in which they partner with a surety to support new and emerging contractors obtain surety support. A surety professional will be able to guide you to the program that best fits your particular circumstances.

How may I determine if a bond is valid and authorized by a surety?

The first step is to determine if the surety is licensed and authorized in the jurisdiction of the project/obligation. One way to do this is to contact the state insurance department to confirm the surety is authorized to issued bonds in this area. Another way would be to reference the U.S Department of Treasury Listing of Approved Sureties, Department Circular 570 (also called a T-List). If a surety has been issued a certificate of authority and may issue bonds for federal projects, they will be listed.

The next step is to contact the surety directly to obtain confirmation the bond was issued with the surety’s knowledge and consent. If the surety appears on the Circular 570 mentioned above, a specific contact number for this purpose may be found.

For additional information, questions, or details on how to obtain a surety bond, please contact us at: Bonds@thecampbellgrp.com  or call 800-748-1351.

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