Bonds provide small contractors with numerous benefits. The surety bond provides protection against contractor default. The surety company helps the contractor avoid costly delays and contract disputes, by intervening before it’s too late. When a project is bonded, there’s also an added layer of payment protection for workers and suppliers of the contractor. Surety bonds help level the playing field, and allow a small contractor to compete in the free market, leading to lucrative contracting opportunities.
A Principal is legally obligated to reimburse the Surety Company for any loss and expense incurred by the Surety. The Principal’s obligation to the Surety can, therefore, be greater than the original obligation to the obligee. The Surety has the same recourse against the Principal as any other creditor would have in recovering their loss. This is the primary difference between a surety bond and insurance.
The Surety’s claim department will conduct an investigation as quickly as possible to avoid any further damages and mitigate their exposure. It is important to note as the Principal under a bond, that a pending claim does not necessarily mean there will be a financial loss incurred since the dispute may not even be legitimate. If the Surety does determine through their examination that the claim is valid, the Principal will be reminded of their obligations under the indemnity agreement and given the opportunity to satisfy the claim first. If the Principal fails to respond, the Surety will arrange settlement with the Obligee, and implement collection proceedings against the Principal.
Once you know what your buyer wants, you need to approach your bank, a surety company, surety broker or insurance broker. A bank will provide a letter of guarantee and a surety company will provide a surety bond. There are pros and cons to both types.
Letters of Guarantee are not cheap. When your bank issues a letter of guarantee, you have to pay a fee to have it issued and your line of credit is debited. This can lead to a cash flow crunch. You are also exposed to extra risks because your buyer can call the guarantee at any time without cause.
Surety bonds don’t cause as much of a cash flow crunch because, only in the most extreme cases, will a surety company demand 100 % cash collateral. As well, buyers will, at times, pay fees associated with a surety bond. On the other hand, these bonds are not as easy to get as bank guarantees.
The amount of time to obtain your bond depends on several different variables. The most important being how long it takes you to respond to what is needed. The faster you get your agent the information they need to write the bond, the faster they can send it up to the bonding company for approval. Of course there are other variables, such as how busy the bonding company’s underwriters are at any given time. At Bernard Fleischer & Sons, Inc. we make sure to process your bond as fast as possible.
Surety bond premiums vary from one surety to another, but can range from one-half of one percent to two percent of the contract amount, depending on the size, type, and duration of the project and the contractor. In many cases, performance bonds incorporate payment bonds and maintenance bonds. When bonds are specified in the contract documents, it is the contractor’s responsibility to obtain the bonds. The contractor generally includes the bond premium amount in the bid and the premium generally is payable upon execution of the bond. If the contract amount changes, the premium will be adjusted for the change in contract price. Payment and performance bonds typically are priced based on the value of the contract being bonded, not necessarily on the size of the bond. Commercial bonding has a greater range of pricing; high risk programs have a high premium and 10% collateral.
A surety company must determine the probability of a loss should the principal be unable to complete their obligations under the bond. Since a bond is an extension of credit, the surety company must analyze the principal’s financial standing and business aptitude to determine if the principal has the financial strength and business knowledge to support the bonded obligation. This is called the underwriting process. Surety company underwriters evaluate risks in ways similar to banks evaluating loan applications. Underwriters consider business and personal financial statements, credit reports, credit references and other factors.
While reading quick summaries of different kinds of bonds, I paused on the description of title bonds. I think they illustrate well the basic idea behind bonds, and how they act as a mechanism of trust between two parties.
Title bonds are required usually by state governments before they will reissue titles for larger items like cars. They bond you to your claim that you have legitimate ownership of the item in question, so that people can’t just go around stealing things and filling out some paperwork to have it legally defined as theirs.
For instance, let’s say you lost your copy of the title to your truck that you bought from that shady little used car lot way out of town. Maybe you never got a proper title from the dealership; they didn’t have one at the time, they said, and a bill of sale would be just as good. After a few years, you decide to sell it, but the buyer says that a bill of sale is not enough, that you will need to get a title to transfer to him. You try to find the dealership to get a copy, but find out that they went out of business, got shut down for “correcting” their lot’s odometers, and that no trace of them remains.
Now, in order to get a title reissued by the state, you will need to buy a title bond from a bonding agency like Bernard Fleischer & Sons. The state will generally decide how much we will have to write the bond for. That bond will guarantee any damage done to the car while it is in your possession, in the event that a more legitimate title-holder materialized later on. Perhaps you discover that your dealership was “correcting” ownership on their cars as well as mileage. Now you just have to hope that the shady dealership way out of town had posted a Motor Vehicle Dealer Bond.
A Fiduciary is a person appointed to handle the affairs of another who, for one reason or another is unable to handle their own affairs. If the reason is the person is a minor, the fiduciary is called a guardian. When the reason is death, the court appoints an administrator. If the deceased has left a will, naming some person to be the administrator, the court usually permits that person to qualify as an executor.
If the reason is mental incompetence, physical disability, inability to conserve his own assets, the fiduciary is called a committee, a conservator or a guardian.
When a businessman’s financial affairs become involved, an assignee for the benefit of the creditors is named. If placed in a receivership a fiduciary is known as a receiver.
Please note: Fiduciaries are usually required by statute to furnish bonds, conditioned on faithfully performing their duties in the appointed capacities.
Court Bonds can be the most confusing kinds of bonds. Here’s what I’ve made out of the confusion:
Court Bonds relate to court proceedings, all of which involve two parties: the plaintiff and the defendant. So it makes sense that court bonds are divided into two categories: Plaintiff’s Bonds and Defendant’s Bonds. Both of these bonds are required as protection for the other party. Plaintiff’s bonds protect the defendant–bond the plaintiff to the defendant’s protection, if you will–and defendant’s bonds protect the plaintiff.
An example of a Plaintiff’s Bond–one specifically called an attachment bond–would be if the plaintiff was claiming that the defendant owed him, say, several thousand dollars. The plaintiff could “attach” something like the defendant’s car so that, if the court ruled in the plaintiff’s favor, the defendant’s car could be sold to pay the plaintiff his money. The problem with this is that the court may not rule with the plaintiff, which would be depriving the defendant of his car for no good reason. The plaintiff’s bond assures that the defendant will be compensated for his loss, perhaps at the plaintiff’s expense.
An example of a Defendant’s Bond–one specifically called a garnishment bond–would be if the plaintiff, let’s say a car dealership, sold the defendant a car, to be paid for in monthly installments. If the defendant then didn’t pay his bills from the dealership, they could ask the courts for the power to “garnish” the money straight out of the defendant’s salary. However, it’s possible that the court might not allow the dealership to garnish the defendant’s salary, and maybe instead would tell them to just take back the car. The the dealership therefore has to buy a garnishment bond promising that they will cover whatever losses the defendant sustained from his salary being garnished, if it turns out that they’re just going to repossess the car.
Bernard Fleischer & Sons has been supplying bonds as well as personal and commercial insurance since 1949. Our attention to detail and outstanding customer service has allowed us to grow and they offer services in all 50 states. The launch of BFBond.com has made it possible for anyone in the United States to quickly apply for whichever type of bond they may require.