Why You Need Contractor Bonds
You can never be too prepared when it comes to your business, workplace, or occupation. Contractors should be especially prepared considering the specific obligations and legal responsibilities of their work. That being said, if any mistakes are made, it can cost the contractor as well as the business quite a bit of money. At any time, clients can make claims against the contractor or developer, and these can become quite expensive.
The Purpose of Contractor Bonds
Nowadays, contractors’ insurance companies also offer a variety of contractor bonds insurance. This type of insurance is generally known as surety bonds insurance. A bond is quite simply a three-way contract between the contractor (the principal), the owner (the obliges) and the bonds insurance company (the surety). The surety is typically always a company licensed by several various insurance departments to write bonds. In some cases, a private person can also act as a surety.
The contractor is referred to as the principal in bonds insurance because the contract is his or her primary responsibility. The bond is provided when the surety and principal promise that the contract will be performed according exactly to its terms. In essence, the surety solidifies the promise that if the contract is not performed, he or she will subsequently pay damages if the Principal cannot.
The owner (or oblige) thus benefits from the promise described in bonds insurance. Both the principal and surety sign the bond, but the owner does not. However, the owner does have certain obligations under the bond, such as paying the contractor on the job. If the owner does not perform his or her own obligations under the contract, then neither the principal nor the surety is bound by the contract.
Although described as bonds insurance, bonds are not adequate insurance policies. Insurance policies such as general liability insurance, worker’s compensation, and other types of business insurance are required for all builder/development type companies. Bonds insurance merely provides an extra level of financial resource backing the contractor. It is recommended that you obtain bonds insurance in the event that a contractor cannot meet contractual obligations through his or her own assets.
Additionally, bonds insurance does not assure the financial or professional integrity or competency of a contractor.
Many bonds are created to protect a contractor, builder, or developer against second-rate work that does not comply with local building codes. You will find that most commercial banks, insurance companies and institutional lending companies not only recommend contractors to secure bonds for large jobs, but typically require them.
What To Know About Surety Bonds Insurance
When a client enters into negotiations or the bidding process in regards to a construction contract, he or she will undoubtedly have a concern on whether or not the potential contractor is both competent and capable of doing the work. Several questions should be answered during this process, which include:
Where does the owner stand if any problems arise, for example, if the contractor is unable to complete the contract?
Is the contractor financially strong enough to finance the work and pay his or her sub-contractors and suppliers?
Does the contractor have experience in the type and size work to be done?
It is quite difficult for an owner to properly check a contractor’s financial credentials. Bond insurance, in turn, helps to protect the oblige, or the owner of the company in which the contractor works. Although background checks can be conducted and personal references can be provided by prospective contractor employees, bonds insurance will protect an employer from these types of circumstances and more.
Types of Surety Bonds
There are two specific types of surety bonds insurance that are of primary interest to customers. The first type is a contract bond, which consists of bid bonds, performance bonds, and labor & material payment bonds. The second type is called license bonds or permit bonds, which are required for many occupations, especially contractors.
As part of the contract bonds insurance, a bid bond is an obligation undertaken by a bidder promising that the bidder will enter into the contract and furnish the prescribed performance and payment bonds within a specified period of time (assuming the contractor is awarded the contract).
Performance bonds insurance refers to the promise by a third party (the bonding company) to pay, or often perform, if the designated contractor fails to complete the contract. It covers the contractor’s actual performance of the contract. Quite similarly, a labor & material payment bond can also work to protect an owner from liens against his or her property if the contractor fails to pay workers, sub-contractors and/or suppliers. The benefit of the payment bond is largely for a private oblige in that it provides a source of funds for those who might otherwise be able to enforce a lien against the oblige’s property. Performance and payment bonds insurance may be two separate documents, each possessing its own penal sum. They may also be combined in one document with a single penal sum. The penal sum is generally matched to the contract amount at the time the bonds insurance is executed.
To obtain bonds insurance, as well as all other types of contractors insurance, trust ContractorsInsurance.org to help you find excellent coverage for the right price. For more information, click for a free quote or call our contractors insurance specialists at 1-800-649-9094 today.