As a project owner, the way you evaluate and manage risks and make fiscally responsible decisions are crucial to your success. You typically cannot afford to gamble on a contractor whose reliability is uncertain or who might come up bankrupt halfway through a job. To mitigate this risk, investing in a surety bond is an excellent safety net.

Suretyship is a very specialized line of insurance that is created when one party guarantees performance of an obligation by another party. A surety bond is a written agreement that includes three parties: the principal party (the contractor) who undertakes the obligation, the surety company (e.g. GIS) who guarantees the obligation will be performed, and the obligee (the project owner) who receives the benefit of the bond. These bonds are available as contract, or corporate, surety bonds and commercial surety bonds.

Contract (or Corporate) Surety Bonds vs. Commercial Surety Bonds

Contract, or corporate, surety bonds provide financial security and construction assurance for building and construction projects. These bonds achieve this by assuring the project owner that the contractor will perform the work and compensate certain subcontractors, laborers, and material suppliers as determined by the contract.

Contract surety bonds include bid bonds that provide financial assurance 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.

They also include performance bonds that protect the project owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions; payment bonds that guarantee the contractor will pay certain subcontractors, laborers, and material suppliers associated with the project; maintenance bonds that guarantee against defective workmanship or materials for a specified period; and subdivision bonds that make guarantees to cities, counties, or states that the principal will finance and construct certain improvements such as streets, sidewalks, curbs, gutters, sewers, and drainage systems.

On the other hand, commercial surety bonds specifically guarantee performance by the contractor. These bonds include license and permit bonds required by state law or local regulations to obtain a license or permit to engage in a particular business (e.g., contractors, motor vehicle dealers, securities dealers, employment agencies, health spas, grain warehouses, liquor and sales tax); judicial and probate bonds, or fiduciary bonds, that secure performance and compliance with court orders (e.g., administrators, executors, guardians, trustees of a will, liquidators, receivers, and masters); judicial proceedings court bonds that cover injunction, appeal, indemnity to sheriff, mechanic’s lien, attachment, replevin, and admiralty; public official bonds that guarantee the performance of duty by a public official (e.g., treasurers, tax collectors, sheriffs, judges, court clerks, and notaries); federal, or noncontract, bonds that are required by the federal government (e.g., Medicare and Medicaid providers, customs, immigrants, excise, and alcoholic beverage); and miscellaneous bonds that cover lost securities, leases, guaranteed payments of utility bills, and guaranteed employer contributions for union fringe benefits and workers’ compensation for self-insurers.

How Does Suretyship Compare to Other Forms of Insurance?

It’s important to recognize the similarities between suretyship and other forms of insurance. State insurance commissioners regulate both suretyship and other insurance, and both provide a valuable safety net for financial loss. However, key differences exist between suretyship and other insurance.

In traditional insurance, the risk is transferred to the insurance company. In a suretyship, the risk remains with the contractor, or the principal, and the protection of the bond is designated for the project owner, or the obligee. When we underwrite traditional insurance products, the goal is to “spread the risk.” Meanwhile, in a suretyship, surety professionals view their underwriting as a form of credit with an emphasis on the prequalification and selection process. While in traditional insurance, the insurance company assumes the part of the premium for the policy that will be paid out in losses, in true suretyship, the premiums paid are “service fees” charged for the use of the surety company’s financial backing and guarantee.

Depending on how you prefer to distribute risk, traditional insurance or a combination of suretyship and traditional insurance may be preferred over pure suretyship. Work with your GIS advisor to determine the best fit for your business.

Protect Yourself with Surety Bonds

Current federal law known as the Miller Act requires performance and payment protection for all public work contracts in excess of $100,000. In nearly all 50 states, the District of Columbia, Puerto Rico, and most local jurisdictions, similar legislation requires surety bonds on public works as well.

By obtaining a surety bond, you can transfer the risks associated with completion dates and quality concerns to General Insurance Services. Connect with us to protect your business and construction projects with a guaranteed surety bond today.