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CONTRACTOR BONDS FAQs

(Surety Bonds)


What is a Surety Bond?
In the simplest terms, a Surety Bond is a guarantee. What the Bond guarantees varies depending on the language of the Bond. It is a form of credit, not insurance.

What is the process to obtain a Contractor Bond?
To start the process you need to apply. Your agent will usually have an approval for you anywhere from that same day to 4 business days. This could be for Bonds such as Contractor Bid Bonds, Contractor Performance Bonds, Contractor Completion Bonds or the like. You will then be given your premium cost and an agreement between you and the Bonding company. The Bond is then issued 1-2 business days from receipt of payment and the agreement (original agreement is often required).

What is the process to obtain a Contractor License Bond or Artisan Contractor License Bond?
To start the process you need to contact your agent. Your agent will usually have an approval and premium quote for you anywhere from immediate or up to 3 business days according to your credit. The Contractor License Bond is then issued anywhere from the same day to 1-2 business days from receipt of payment and the agreement (original agreement is often required).

How do Contractor Surety Bonds work?
The Principal (you), pays a percentage of the Bond amount called a Bond premium. In return, the Surety extends "Surety Credit" to make the required guarantee (the Bond). A claim can arise when the Principal does not abide by the terms of the Bond. In the event of a claim, the Surety will investigate to ensure it is valid. If the claim is valid, the Surety will look to the Principal for payment of the claim and any associated legal fees.

What good is a Bond if I have to pay for claims?
A Bond is not insurance, it is a form of credit where the Principal (you) are responsible to pay any claims. The alternative to a Contractor Bond is to post cash or a letter of credit. Surety Bonds are advantageous, as they typically require no collateral, which frees up capital. Bond premiums are also similar to fees for letters of credit and are typically less than one would earn making conservative investments with the available capital.

How much do Contractor Bonds cost?
Bond premiums vary greatly depending on the applicant, the Bond type, Surety, and the Obligee. Just like other forms of credit, everyone does not receive the same rate. Standard market rates are typically anywhere from 1-3%, while higher risk markets can range anywhere from 5-20% of the Bond amount.

Why do I need a Surety Bond?
Simply because a government authority or private entity is requiring the Bond in order for you to operate. The Bond ensures you will follow their guidelines.

Who is the Obligee?
The Obligee is whoever is requiring the Bond of you. You are not the Obligee. For example, the Obligee for a contractor would be whoever they are doing the work for. The Obligee for a license Bond (e.g. auto dealer or mortgage broker) would be whoever they are filing their license with.

What is a blank Bond form and where do I get one?
It is a blank copy of the Bond that you are required to post. It states exactly what the Bond is guaranteeing. Your Bond agency will use it to create the original Bond by completing the blanks on the form, signing on behalf of the Surety, and attaching a power of attorney. You need to obtain a blank copy of the Bond form from the Obligee.

What is the turnaround time?
Approval time varies depending on the type of Bond and the program the applicant falls under. Some are approved immediately; others can take up to 1-4 business days. Contractor Bond issuance is typically 1-2 business days from receipt of payment and anything else required by Surety for issuance of the Bond.

*The above terms and opinions are to be used for descriptive and reference purposes only. Please review your individual policy for full definitions, exclusions and endorsements. Should you have any questions, please contact your Broker or Agent.
Industry Links
Building Owners & Managers Association Int'l
http://www.boma.org

Industry Links
Associated Builders & Contractors
http://www.abc.org

Industry Links
The Contractors Group
www.thecontractorsgroup.com

Industry Links
American Society of Civil Engineers
http://www.asce.org

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