Bonds Insurance

You can never be too prepared when it comes to your business, workplace, or occupation. Contractors should be especially prepared considering the specific obligations and legal responsibilities of their work. That being said, if any mistakes are made, it can cost the contractor as well as the business quite a bit of money. At any time, clients can make claims against the contractor or developer, and these can become quite expensive.

Bonds Insurance

Nowadays, contractors' insurance companies also offer a variety of bonds insurance. This type of insurance is generally known as surety bonds insurance. A bond is quite simply a three-way contract between the contractor (the principal), the owner (the obliges) and the bonds insurance company (the surety). The surety is typically always a company licensed by several various insurance departments to write bonds. In some cases, a private person can also act as a surety.

The contractor is referred to as the principal in bonds insurance because the contract is his or her primary responsibility. The bond is provided when the surety and principal promise that the contract will be performed according exactly to its terms. In essence, the surety solidifies the promise that if the contract is not performed, he or she will subsequently pay damages if the Principal cannot.

The owner (or oblige) thus benefits from the promise described in bonds insurance. Both the principal and surety sign the bond, but the owner does not. However, the owner does have certain obligations under the bond, such as paying the contractor on the job. If the owner does not perform his or her own obligations under the contract, then neither the principal nor the surety is bound by the contract.

Although described as bonds insurance, bonds are not adequate insurance policies. Insurance policies such as general liability insurance, worker's compensation, and other types of business insurance are required for all builder/development type companies. Bonds insurance merely provides an extra level of financial resource backing the contractor. It is recommended that you obtain bonds insurance in the event that a contractor cannot meet contractual obligations through his or her own assets.

Additionally, bonds insurance does not assure the financial or professional integrity or competency of a contractor.

Many bonds are created to protect a contractor, builder, or developer against second-rate work that does not comply with local building codes. You will find that most commercial banks, insurance companies and institutional lending companies not only recommend contractors to secure bonds for large jobs, but typically require them.

What to Know About Surety Bonds Insurance

When a client enters into negotiations or the bidding process in regards to a construction contract, he or she will undoubtedly have a concern on whether or not the potential contractor is both competent and capable of doing the work. Several questions should be answered during this process, which include:

• Does the contractor have experience in the type and size work to be done?

• Is the contractor financially strong enough to finance the work and pay his or her sub-contractors and suppliers?

• Where does the owner stand if any problems arise, for example, if the contractor is unable to complete the contract?

It is quite difficult for an owner to properly check a contractor's financial credentials. Bond insurance, in turn, helps to protect the oblige, or the owner of the company in which the contractor works. Although background checks can be conducted and personal references can be provided by prospective contractor employees, bonds insurance will protect an employer from these types of circumstances and more.

Types of Surety Bonds

There are two specific types of surety bonds insurance that are of primary interest to customers. The first type is a contract bond, which consists of bid bonds, performance bonds, and labor & material payment bonds. The second type is called license bonds or permit bonds, which are required for many occupations, especially contractors.

As part of the contract bonds insurance, a bid bond is an obligation undertaken by a bidder promising that the bidder will enter into the contract and furnish the prescribed performance and payment bonds within a specified period of time (assuming the contractor is awarded the contract).

Performance bonds insurance refers to the promise by a third party (the bonding company) to pay, or often perform, if the designated contractor fails to complete the contract. It covers the contractor's actual performance of the contract. Quite similarly, a labor & material payment bond can also work to protect an owner from liens against his or her property if the contractor fails to pay workers, sub-contractors and/or suppliers. The benefit of the payment bond is largely for a private oblige in that it provides a source of funds for those who might otherwise be able to enforce a lien against the oblige's property. Performance and payment bonds insurance may be two separate documents, each possessing its own penal sum. They may also be combined in one document with a single penal sum. The penal sum is generally matched to the contract amount at the time the bonds insurance is executed.

With performance and payment bonds insurance, there are often notice requirements and time limits set forth in which a claim must be filed, and a lawsuit may or may not be required. Often times, a claimant will be required to sue and attempt to collect from the contractor before the surety is required to pay.

Another type of bonds insurance is known as maintenance bonds, bonds that are typically required to guarantee the contractor's performance of certain maintenance over a set period of time after completion of the work.

License and permit bonds are the bonds that are most often required by state law, municipal ordinance, or by federal regulation. In some instance, the federal government or its agencies will require this type of bonds insurance. In order to be licensed, a contractor must have a bond, as well as the proper insurance coverage. The bond is permitted to be written by a surety company, or as a cash deposit made with the state (allowable in some states).

The general purpose of license or permit bonds insurance is to safeguard the public health, welfare and morals, and to assure the public's safety. These types of bonds are typically for the benefit of laborers, suppliers, and taxing authorities, in addition to the persons who enter into contract with the contractor. The amount of the bond, also known as the penal sum, is the maximum limit of the surety's liability to all claimants combined. Therefore, if a contractor has multiple claims made against its bond, the protection for any individual may be considerably less than the full amount of the bond.

License or permit bonds insurance may provide someone with only minimal protection. Upon entering into a construction contract, it is crucial for an owner to call the licensing agency to ensure that the contractor has all necessary bonds insurance, as well as other adequate insurance coverage, appropriate for their line of business. The owner should also determine whether or not there are any current or past claims made against the bond. The insurance coverage can be confirmed by obtaining a current certificate of insurance.

If a claim is made under bonds insurance, the person would be well advised to consult an attorney. The method of claiming is typically set forth in the statutes of a license and permit bond. It is very important to make note that some pending claims are not always a reflection on a contractor's abilities or financial stamina. Rather, a claim can often be the result of a legitimate dispute or simply a "nuisance" suit.

To obtain bonds insurance, as well as all other types of contractors insurance, trust contractorsinsurance.org to help you find excellent coverage for the right price. For more information, click for a free quote or call our contractors insurance specialists at (516) 294-1072 today.