Understanding the Basics of Surety Bonds

Gurantee Bond Payment in San Diego, CA

Some contracts involve the need for 3 distinct parties: the recipient of an obligation, the party who performs the obligation, and the surety company that assures the project will be completed. Contracts such as these are known as surety bonds. Because these types of contracts can be difficult to navigate, the San Diego bond insurance experts at American Tri-Star are here to explain some basic ideas you need to understand about them.

What Is a Surety Bond?

A surety bond is a financial instrument that ensures a project will be completed even if the contractor defaults on the obligation. The contractor obtains a surety bond to protect the project owner in the event the contractor’s end of the deal is not held up. If the first contractor defaults, the surety company now becomes responsible to find another contractor to complete the project. In some cases, the surety company may be obligated to compensate the project owner for any financial losses incurred as a result of the contractor’s default.

There are 4 types of surety bonds:

Bid Bond

A bid bond may be used to ensure the bidder on a project actually follows through on contract delivery if awarded the contract. The bidder also needs to furnish performance and payment bonds.

Performance Bond

A performance bond ensures a project is completed according to the terms and conditions of the contract. All parties involved must agree on the contract and how it is fulfilled.

Payment Bond

A payment bond may be used to ensure all parties to a contract are fully paid, which may also include suppliers and subcontractors. Making sure appropriate vendors are paid can help prevent mechanic’s liens and other possible issues.

Ancillary Bond

An ancillary bond ensures key components of a contract are fulfilled. However, these components may not necessarily be related to performance.

Surety bonds may be needed for various types of projects and are frequently required by states and municipalities. In addition, any federal construction project valued at over $150,000 may require obtaining a surety bond to bid on the project, or it may be stipulated that such a bond is required after being awarded the contract.

To learn more about surety bonds, get in touch with American Tri-Star in San Diego. In addition to being a leading provider of bond insurance, we also offer the affordable commercial, homeowners, health, and auto insurance San Diego residents prefer. Give us a call today at 619-272-2100 and one of our friendly and knowledgeable agents would be happy to assist you.