Insurance Analysis

Contracting Bonds

Fundamentally, surety is one person guaranteeing the performance of another person.  Today, insurance companies are the primary source for providing Surety Bonds.

Bonds can be purchased that are centered around the work of certain individuals.  Examples include bonds on a comptroller, an elected official (e.g., county treasurer), a court assigned guardian of a child, or another person in an occupation where handling funds or performing a service correctly and honestly is required.  Occupations that require a license, such as auctioneers or notary publics, also require bonding.  In those cases, the license authority is able to call the bond to collect fines associated with failure to perform duties, if the licensed person performs their business improperly.

Bonds are used extensively in a variety of industries.  For example, land owners often have construction contractors purchase a bond from an insurance company, guaranteeing that the construction contract will be completed.  The bond guarantees that the insurance company, the Surety, will step in and complete the work in accordance with plans and specifications, if the contractor fails to do so.  In this way the land owner is not relying on the contractor's financial viability through the entire term of a long-term, high-cost contract.  In the event of a problem, the surety will stand in and take the contractor's place, thus helping assure the land-owner that the construction contract will be satisfied.

Types of bonds:

Bid Bonds - Provide financial assurance that the bid has been submitted in good faith, and that a contractor will enter into a contract at the amount of their bid, and post the appropriate performance bonds. These bonds are used by owners to pre-qualify contractors submitting proposals on contracts. 

Blanket Bonds - Protect against dishonesty of all of the employees of an entity to the stated amount of the bond. 

Blanket Position Bonds - Protect against dishonesty of each of the employees of an entity stated on the bond to the stated amount of the bond. 

Blanket Public Official Bond - Cover all public employees of the public entity stated on the bond, to the stated amount of the bond. 

Commercial Bonds – Refers to a classification of all bonds other than contract and performance bonds. Commercial bonds cover obligations typically required by law or regulation. Each bond is unique to the circumstances at hand. 

Commercial Blanket Bonds - Provide a single amount of coverage to cover dishonest acts of employees, regardless of the number of employees involved in the loss. In other words, this type of bond covers all employees to the amount stated on the bond. 

Contract Bonds - Provide financial security and the construction assurance on building and construction projects by assuring the project owner (obligee) that the contractor (principal) will perform the work and pay certain subcontractors, laborers, and material suppliers. 

Fidelity Bonds - Protect against dishonesty. Generally, the bond protects against the dishonesty of employees. These bonds cover losses arising from employee dishonesty and indemnify the principal for losses caused by the dishonest actions of its employees.

Fiduciary Bonds - Protect against dishonest accountings and a lack of faithful performance of duties by administrators, trustees, guardians, executors, and other fiduciaries. Fiduciary bonds, in some cases referred to as probate bonds, are required by statutes, courts, or legal documents for the protection of those on whose behalf a fiduciary acts. They are needed under a variety of circumstances, including the administration of an estate and the management of affairs of a trust or a ward. 

License and Permit Bonds – Required to obtain a license or permit in many cities, counties, states or other political subdivisions. They may be required for a number of reasons, including the payment of certain taxes and fees or providing consumer protection as a condition to granting licenses related to selling things such as motor vehicles or contracting services. 

Maintenance Bonds - Provide for upkeep of the project for a specified period of time after a project is completed. These bonds protect against defective workmanship or materials. 

Miscellaneous Bonds – Cover the performance of contracts and agreements with private parties and government agencies for things such as lost securities, utility deposit, wages, and welfare. 

Name Schedule Bonds - A type of public official or fidelity bond that lists the specific names and amounts of each named individual bonded. Name schedule bonds use one bond, but attach a schedule of individual names of the bonded public officials. For each name, the bond will list a specific dollar amount for which that individual is being bonded. These may be used to bond a panel of city council members or similar body of officials. 

Notary Public Bonds - Include bonds that are required by statutes to protect against losses resulting from the improper actions of notaries. 

Payment Bonds – Cover payment of the contractor's obligation, under the contract, for subcontractors, laborers, and materials suppliers associated with the project. Since liens may not be placed on public jobs, the payment bond may be the only protection for those supplying labor or materials to a public project. 

Performance Bonds - Cover performance of the terms of a contract. These bonds frequently incorporate payment bond (labor and materials) and maintenance bond liability. This protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions. 

Position Schedule Bonds - A type of fidelity or public official bond, which lists specific positions and their corresponding penalty, amounts. Position schedule bonds use one bond, but attach a schedule of positions to be bonded. For each name, the bond will list a specific dollar amount for which that individual is being bonded. This type of bond may be used to bond certain positions that have a high amount of turnover. Using a position instead of a name will reduce the paperwork involved year-to-year.

Public Official Bonds – Protect against dishonesty and lack of faithful performance by a public official. These bonds are required by statutes and ordinances. 

Reclamation Bonds – Provides protection in the event that a person or entity does not restore land that it has mined, or otherwise altered, to its original condition.

Supply Bonds – Cover performance of a contract to furnish supplies or materials. In the event of a default by the supplier, the surety indemnifies the purchaser of the supplies against the resulting loss. 

Surety Bonds - Three-party agreements in which the issuer of the bond (the surety) joins with the second party (the principal) in providing protection to a third party (the obligee) regarding fulfillment of an obligation on the part of the principal. An obligee is the party (person, corporation, or government agency) to whom a bond is given. The obligee is also the party protected by the bond against loss. 

If you would like more information on bonding simply fill out our quick and easy online form (on the left above) or call us at 814-629-5607 today for a free, secure bond insurance quote.

 ML