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California Bonding & Surety 101

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by Michael Bell on Jan 28, 2015

California Bonding Defined

A surety bond is not an insurance policy. A surety bond is a guarantee in which the surety guarantees that the contractor, called the “principal” in the bond, will perform the “obligation” stated in the bond. For example, the “obligation” stated in a bid bond is that the principal will honor its bid. The “obligation” in a performance bond is that the principal will complete the project.  The “obligation” in a payment bond is that the principal will properly pay subcontractors and suppliers. Bonds frequently state, as a “condition”, that if the principal fully performs the stated obligation, then the bond is void; otherwise the bond remains in full force and effect.

There are generally three types of bonds used for construction projects

  1. The bid bond assures that the contractor, if chosen for the project, will enter into the contract and provide any required performance and payment bonds.
  2. The performance bond assures that the contract will be completed in accordance with the contract, or that the funds will be provided to complete the project, up to the amount of the bond.
  3. The payment bond assures that subcontractors, suppliers, and laborers will be paid for their work.

Why Projects Go Bad

Both owners and contractors agree that project failures have common characteristics. Some of which are; the inability to meet the project schedule, timely payments, failure to order material in a timely manner, failure to understand contract terms, lack of safety programs, project design flaws and lack of project management. Some of these can be preventable through communication and reasonable expectations between all parties.

Having a good understanding of the bond application and review process, and developing relationships with your agent, banker, and surety underwriter can only benefit you and help you grow your business. 

Robert Bell Insurance Brokers can provide outstanding products supported by value-added services to commercial banks, savings and loans, insurance companies, finance and loan companies, and credit unions.

 



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