Bonding

Surety Bonds for Terre Haute and Wabash Valley Businesses

Crapo Insurance Agency can help Terre Haute and Wabash Valley businesses identify the type of bond being requested and review available bonding options.

Surety bonding is different from ordinary business insurance, so understanding what the bond guarantees—and who it protects—is an important first step.

What Is a Surety Bond?

A surety bond is generally a three-party agreement involving:

If those obligations are not fulfilled, the bond can provide payment up to the amount and terms specified in the bond.

A Surety Bond Is Not the Same as Liability Insurance

Although surety bonds are frequently obtained through insurance agencies and issued by companies associated with the insurance industry, they serve a different purpose from a standard liability policy.

General liability insurance is primarily intended to protect the insured business against certain covered claims.

A surety bond primarily provides a guarantee to the obligee that the principal will perform a specified obligation.

That distinction is important when a customer, government agency, or project owner tells you that a bond is required.

Contract Bonds and Commercial Bonds

Surety bonds can broadly be divided into contract bonds and commercial bonds.

Contract bonds relate to the performance of a particular contract or project.

Commercial bonds generally relate to compliance with laws, regulations, licensing requirements, permits, or other obligations.

Different businesses may therefore need very different types of bonds.

Bid Bonds

A bid bond may be required when a contractor submits a bid for a project.

Its purpose is generally to provide assurance that the bidder will honor its bid and, if awarded the contract, enter into the contract and provide any required final bonds.

Bid bonds are common in construction and public contracting but may be required in other situations as well.

Performance Bonds

A performance bond provides assurance that the contractor will perform and complete its contractual obligations according to the terms of the bond and contract.

These bonds can be required on public projects and may also be required by private project owners.

Payment Bonds

A payment bond provides protection relating to payment of certain subcontractors, suppliers, or others furnishing labor or materials for the bonded project.

Payment bonds are often associated with construction contracts and may be required along with a performance bond.

License and Permit Bonds

Some businesses and professionals must obtain a bond as a condition of receiving or maintaining a license or permit.

These are generally commercial surety bonds rather than contract bonds.

A government agency or other authority may require the bond to help assure compliance with applicable laws, regulations, or licensing requirements.

The exact bond form and amount are usually determined by the agency or authority requiring the bond.

If you have been told that you need a license or permit bond, providing the exact bond requirement or application form can help identify the correct product.

Other Types of Surety Bonds

Depending upon the business, project, and organization requiring the bond, other bond types may include:

• maintenance bonds
• ancillary bonds
• court bonds
• public-official bonds
• miscellaneous commercial bonds
• other specialized surety obligations

Not every surety company writes every type of bond, and underwriting requirements can vary considerably.

The first step is usually determining exactly who requires the bond, what obligation is being guaranteed, the required bond amount, and the required bond form.

Why Would a Business Need a Bond?

A business may be asked to obtain a bond because:

• a government agency requires it
• a license or permit requires it
• a construction contract requires it
• a project owner requires it
• a customer requires it
• a public bid requires bonding
• a general contractor requires subcontractor bonding
• applicable law or regulation requires financial assurance

In many cases, the organization requiring the bond will specify both the bond amount and the required wording.

Providing that documentation to your agent can make the bonding process more efficient.

What Information May Be Needed?

Bond requirements vary widely.

For a relatively straightforward license or permit bond, the information requested may be limited.

More substantial contract bonds can require considerably more underwriting information.

Depending upon the bond, the surety may request information concerning:

• business ownership
• experience
• credit history
• financial statements
• bank information
• current work in progress
• previous completed projects
• contract amount
• project details
• bond amount
• the required bond form
• other existing bonded obligations

For contract bonds, the surety may evaluate the applicant's financial strength, experience, capacity to complete the work, and other underwriting considerations.

This is often described broadly as evaluating the contractor's credit, capacity, and character.

Start the Bonding Process Before the Deadline

Bond requirements can sometimes arise shortly before a bid deadline, license renewal, or project start date.

Whenever possible, it is better to begin the process early.

Having the following information available can help:

• the name of the organization requiring the bond
• the exact bond amount
• the required bond form
• the deadline
• the contract or project documents
• any instructions provided by the obligee

More complex contract bonds may require additional time for underwriting and financial review.

Bonding for Contractors

Contractors may encounter bonding requirements when bidding on public or private projects.

A project can potentially require several bonds during different stages:

The exact requirements come from the contract or project owner rather than from a universal bonding rule.

SBA Surety Bond Guarantee Program

Some small businesses that cannot obtain sufficient bonding through ordinary surety underwriting may qualify for assistance through the U.S. Small Business Administration Surety Bond Guarantee Program.

The SBA does not directly issue the bond. Instead, it guarantees a portion of bonds issued by participating surety companies, which can help qualified small businesses gain access to bonding.

The program can support bid, performance, payment, and certain ancillary contract bonds. Current SBA limits allow eligible contracts of up to $9 million for non-federal contracts and up to $14 million for certain federal contracts.

Federal Projects May Have Additional Requirements

Surety requirements for federal contracts can differ from ordinary commercial bonding.

Corporate sureties used on federal bonds generally must meet federal requirements and appear on the U.S. Treasury's approved surety list, commonly known as Circular 570.

Businesses pursuing federal projects should provide the complete solicitation and bonding requirements when requesting assistance.

The Bond Amount Is Not the Same as the Bond Premium

A required bond may specify a particular bond amount, sometimes called the penal sum.

That is not necessarily the amount the business pays to obtain the bond.

The premium or cost of the bond depends upon factors such as:

• type of bond
• bond amount
• applicant qualifications
• financial information
• credit considerations
• contract size
• project characteristics
• surety underwriting

For more substantial contract bonds, the underwriting process may be considerably more detailed than for a routine commercial bond.

Bonding and Business Insurance Work Together

A surety bond does not normally replace the other insurance policies a business may need.

A contractor could potentially need:

• General Liability Insurance
• Commercial Auto Insurance
• Commercial Property Insurance
• workers' compensation
• umbrella or excess liability
• specialized coverage
• one or more required surety bonds

The insurance policies protect against particular business risks, while a surety bond guarantees a specified obligation to another party.

Talk With a Local Independent Agent

If your business has been told that it needs a surety bond, Crapo Insurance Agency can help you identify the requirement and review available bonding options.

When contacting us, it is helpful to have the bond form, required amount, name of the organization requiring the bond, and deadline available.