A surety bond is a contract that ensures a project will be completed in the event the contractor goes into default. Also known as an obligee, a project owner hires a contractor to complete a project. Once the contractor is hired, he or she will then obtain a bond from a surety agency in San Diego. The surety agency is then obligated to either find another contractor to finish the job or compensate the project owner for any incurred financial losses.
Surety bonds can be used for any business arrangement that is made up of a principal individual or agency, a surety agency and an obligee.
Types of Surety Bonds
There are nine different types of surety bonds. Some examples include commercial surety bonds, contract surety bonds, public official bonds, license and permit bonds, court bonds, fidelity bonds, penal bonds, business service bonds and miscellaneous bonds. The most widely used, especially in the construction industry, are contractual surety bonds. These bonds can be split up into the following categories:
- Bid Bonds – These guarantee that the contractor will form an official contract if he or she wins the bid.
- Payment Bonds – These guarantee that a contractor will pay for any services he or she needs during the project, including subcontractors and materials.
- Performance Bonds – A guarantee that the contractor will perform the work that is specified within the contract.
- Maintenance Bonds – These bonds guarantee that the contractor will repair and perform upkeep on specific items for a set period of time.
Payment of the Premium and Default
An annual premium is paid by the contractor for coverage under the surety bond. If the contractor defaults on their obligations to fulfill a contract, the obligee will file a claim with the surety agency. The surety agency will then pay the obligee and subsequently contact the contractor for reimbursement.
Do You Need a Surety Bond?
Whether or not you need a surety bond will depend on what type of project you’re bidding on. Federally funded public construction projects that are valued over $150,000 require all contractors to have surety bonds. Any state funded project, regardless of amount, will require a surety bond as well.
While most private organizations or individuals won’t require surety bonds, if the amount of money at stake is significant, contractors who are bidding might have to purchase a bond and show proof.
If you are interested in learning more about surety bonds, call the expert San Diego insurance brokers at American Tri-Star Insurance at 619-325-0326 and get a free, instant quote. We are proud to serve San Diego with convenient locations in San Diego, Chula Vista, National City and Vista.