Surety 101
How do I know what type of bond I need?
Because there are tens of thousands of surety bond variables, it can be very confusing figuring out exactly what the risk and obligation might be. Having a surety professional is extremely important to best protect yourself and your company. Not having your surety relationships stable and appropriate can be devastating to a business that is caught off guard when terms change dramatically because of an agent that does not have the expertise to manage all scenarios your surety needs might create.
However, finding out what type of bond you need is an easier process than you might think. There are basically 5 different classifications of surety bonds and as long as you can figure out which class you fit in, the rest is fairly typical. The 5 basic classifications are:
Let’s ask ourselves 3 simple questions so we can figure out what class you fit in.
1. Who is requiring the bond?
2. What kind of business am I?
3. Is there a contract involved?
Just by answering these questions you can easily figure out where you fit and what the process will be. However, there are times when the risk is not so cut and dry and SPS is here to walk you through the process from the very beginning and get you moving in the right direction rather than wasting valuable time.
Contract Bonds
Widely used by the construction industry but also well used within many service groups as well as supply, manufacturing and technology industries among others. These types of bonds guarantee the performance and or payment of obligations under contract.
There are generally 3 parts to the contract surety process. The bid bond, performance bond and payment bond. The three parts are used together but are all completely different. A bid bond is issued as part of a bidding process by the surety to the contract "owner" or Obligee. This is a good faith guarantee that says if the bidder is awarded the contract the bidder will fulfill the contract according to the bid terms including the posting of the performance and payment bonds. Bid bonds are usually between five and ten percent of the full contract amount.
Once the bid bond has been accepted and the contract is awarded most contracts allow for at least 10 days to supply the final payment and performance bonds. These are two separate bonds guaranteeing two separate issues, sometimes written as one bond but are still two separate obligations. The Performance Bond is used to guarantee the schedule, workmanship and completion of the contract outside of the penalties and corrective strategy laid out in the contract. The Payment Bond is used to protect the Obligee from the Principle's sub contractors and suppliers. When payment is not made to a contractor's subs or suppliers, they have a right to file a lien against the total project. The payment bond protects the Obligee for having to pay twice.
It is imperative that when dealing with any contract issue that you have the right group representing you or your client to the surety company. A good bond producer should be able to see issues up front without a lot of back and forth. A good producer should also be able to anticipate problems before they arise and find a solution for the principle under contract and the surety guaranteeing the contract.
Presentation is 50% of the qualifying process. Many of our agents will have SPS present their clients account even when the agent represents the same surety, simply because of the quality of presentation SPS puts together. This allows your company or client to be presented in the best possible light.
Types of Contract Bonds
- Bid Bond
- Maintenance Bond
- Payment BondPerformance Bond
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- Site Improvement Bond
- Subdivision Bond
- Supply Bond
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License & Permit/Misc Bonds
These are the most common types of bonds. Almost every business which needs a license or permit to do business requires a bond to guarantee the owners honesty, integrity, performance and payment. Most of the time license and permit bonds are required by a municipality, state or the federal government.
License and Permit Bonds are generally credit and experience driven, however the bond form and penalty will determine the amount of underwriting and ease of qualification. Bond forms that have a standard cancellation clause and aggregate limit are often times instant issue or require very little underwriting. Performance related issues and bond forms that are open ended or financial guarantees will take more underwriting such as financial and experience analysis. Your underwriter will be able to determine which type of bond we are dealing with and walk you through the underwriting process with little trouble.
A bond that is not to a government agency regarding a license or permit but has similar language is referred to as Miscellaneous. A couple examples of miscellaneous bonds are utility guarantees or tax bonds.
Types of License & Permit/Misc Bonds
- Contractor License Bond
- Tax Collector Bond
- Collection Agency Bond
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- Mortgage Broker Bond
- Lottery Bond
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Court Bonds
Some court proceedings require a bond in order to protect against financial loss for the party you are engaged against in court. Generically, court bond refers to any court ordered bond. There are many types of bonds with different underwriting criteria.
Types of Court Bonds
- Appeal Bond: When a court makes a financial judgment and an appeal has been made, the court will order an appeal bond be in place to protect the original financial judgment. This is for two reasons. One to guarantee the awarded party payment if the appeal is lost, and two is to hopefully stop time wasting appeals. These bonds generally carry a 100% collateral requirement for non-account principles.
A safe rule, is when you are the defendant collateral is required, and when you are the plaintiff collateral may not be required. An Injunction is a good example of a plaintiff bond. This is where the court stops another from continuing an action in question.
- Custodial/Guardianship Bond: These bonds are required by the appointed guardian of an incapable persons assets. Often times you will see this when a minor's parent has passed and has left assets to the minor. The bond guarantees that the responsible party (new guardian or responsible adult / facilitator of the assets) will manage those assets in the minor's best interest until they are an adult. These bonds can also be used for any incapable situation. The physically or mentally challenged, elderly or other reason for a court to deem someone incapable of correctly managing their own assets are other cases when these bonds might be required.
- Probate/Executor Bond: Probate bonds are required by the person who has been charged with the distribution of assets of ones estate. There is an assumed fiduciary responsibility by the executor and this bond is to protect the estates assets from misuse.
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Types of Court Bonds
- Appeal Bond: When a court makes a financial judgment and an appeal has been made, the court will order an appeal bond be in place to protect the original financial judgment. This is for two reasons. One to guarantee the awarded party payment if the appeal is lost, and two is to hopefully stop time wasting appeals. These bonds generally carry a 100% collateral requirement for non-account principles.
A safe rule, is when you are the defendant collateral is required, and when you are the plaintiff collateral may not be required. An Injunction is a good example of a plaintiff bond. This is where the court stops another from continuing an action in question.
- Custodial/Guardianship Bond: These bonds are required by the appointed guardian of an incapable persons assets. Often times you will see this when a minor's parent has passed and has left assets to the minor. The bond guarantees that the responsible party (new guardian or responsible adult / facilitator of the assets) will manage those assets in the minor's best interest until they are an adult. These bonds can also be used for any incapable situation. The physically or mentally challenged, elderly or other reason for a court to deem someone incapable of correctly managing their own assets are other cases when these bonds might be required.
- Probate/Executor Bond: Probate bonds are required by the person who has been charged with the distribution of assets of ones estate. There is an assumed fiduciary responsibility by the executor and this bond is to protect the estates assets from misuse.
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