Surety bonds are a necessary requirement not only for contractors, but also for a variety of small businesses to open. Although required for thousands of businesses to operate, much is unknown about their functions and the process of how to obtain a surety bond. To help clear up the mystery behind the bonding process, the following is look into the most frequently asked questions regarding surety bonding.
What is a surety bond?
Surety bonds are a form of contract. In most cases, they are a financial guarantee that protects customers’ money. In all cases it involves three parties:
- An obligee – the party requiring the bond – most often it’s a government entity
- A principal – the company or individual that is purchasing the bond
- A surety – the agency who writes and sells the bond(s)
If the principal should default on any specifications of the bond, a claim can be made seeking retribution. If the claim is found to be valid, compensation is used by the surety agency who will then, in turn, seek repayment from the principal. Because of this, a risk assessment is always performed in order to ensure principals are financial secure to repay in the event damages should be sought against them.
What are the benefits of becoming bonded?
Even for those that are working on private construction projects, obtaining surety bonds is seen as a validation of the company’s professionalism. Those that are able to acquire a surety bond typically are more financially secure than those who are unable to purchase a bond. Banks and financial lenders also view surety bonds as a form of verification of the company’s trustworthiness and financial stability.
For those that are bidding on a project, surety bonds also help validate the project owner’s financial security. As many know, contractors have faced bankruptcy as the project owner’s funding was not verified. Prior to writing and issuing bonds, the surety will investigate the source and amount of available funds. Sureties also help review contracts to ensure there isn’t any language present that will add unnecessary risk to the project. As a whole, surety bonds help protect project owners and the contracting companies that are preforming the work on the project.
Why are surety bonds required?
Although many have not heard about surety bonds, the fact is they’ve been a necessary requirement for several years. The Miller Act, which was passed in 1935, requires contract surety bonds on federal construction projects. In specific, the law specifies both performance bonds and payment bonds (commonly referred to as material and labor payment bonds). The act specifies these bonds must be in place for projects exceeding $100,000, but many state legislatures have adopted the same theory and require them on smaller projects. These regulations are also known as Little Miller Acts.
Aren't surety bonds another form of insurance?
This is the most common misconception regarding surety bonding. Although both insurance policies and surety bonds have the same goal – to protect consumers – the main difference is where the element of risk lies. In regards to insurance policies, it is traditionally a two-person agreement with the company issuing the policy assuming risk.
However, with surety bonds the principal (or the company purchasing the bond) is assigned risk and the bond protects obligees. If a claim is filed against the bond purchaser, the surety agency will make initial payments to the obligee, and then seek retribution from the principal.
The services bonds and insurance policies provide are also different from one to another. Insurance policies are written to assist in times of loss, however surety bonds are written under the assumption (and hope) no claims will be filed against the principal. Because of this, should a claim be filed against an individual or company, it is extremely difficult for that individual to purchase surety bonds in the future.
Alex Levin is a writer for several surety organizations. Although much is unknown about them, surety bonds are a necessary requirement for many small businesses to open and are required on almost all major construction projects.
Showing posts with label Surety Bonds. Show all posts
Showing posts with label Surety Bonds. Show all posts
September 12, 2011
Guest Post: Tennessee surety bond basics for contractors
Tennessee surety bond basics for contractors
Danielle Rodabaugh, Surety Bonds Insider
The understanding most contractors have of surety bond legalities typically doesn't go much further than the fact that they have to buy bonds before beginning projects. Unfortunately, all too often contractors only really learn about surety bonds after a claim has been made and they're in the the midst of a lawsuit. This article will explore some key legal points that local contractors should know about Tennessee surety bonds.
Surety bonds are not insurance policies. Although insurance companies almost always underwrite surety bonds, they do not function in the same way. Insurance agents expect claims to be made against insurance policies. Conversely, surety providers do not expect claims to be made against bonds, and, if they are, the surety expects the contractor to pay for costs.
Surety bonds are risk mitigation tools that are used to reduce instances of fraud and malpractice across a number of different industries. In the construction industry, surety bonds are also called "contract bonds" or "construction bonds." Government agencies require the use of specific construction bonds that vary depending on the project type and its geographic location. Common ones include bid bonds, performance bonds and payment bonds, just to name a few. No matter the specific bond title, though, they all work in the same basic way.
Each surety bond that's issued essentially functions as a legally binding contract that joins three entities together.
If a principal fails to meet the bond's terms, then the obligee can make a claim on the bond to gain reparation. If the claim is found to be valid, the surety will be held responsible for paying the claim. The surety then expects the principal to repay the agency for all costs, which is a major distinction between surety bonds and insurance policies.
Generally speaking, contractor bonding provides legal protection to government agencies and other project owners who fund a construction project. Most contract bonds are required in case a contractor leaves a project incomplete or does unsatisfactory work, in which case the obligee can make a claim on the bond. Who exactly receives the bond's financial protection, though, depends on the bond's language. For instance, payment bonds actually protect subcontractors and material suppliers by guaranteeing they will be paid for their services.
A number of different laws regulate the use of surety bonds in Tennessee. For starters, the federal Miller Act requires the use of separate payment and performance bonds on every publicly funded project that's contracted for $100,000 or more. The Tennessee Board for Licensing Contractors does not require construction professionals to post a surety bond to get a contractor's license, however, surety bonds can be required for bidding or obtaining contractor permits from local government agencies in the state. Exact contract bond requirements vary by jurisdiction, so contractors should check with the government agency that enforces local construction regulations before beginning any project.
To get a home improvement contractor license in Tennessee, applicants must provide original proof of $10,000 worth of financial responsibility via either a 1) surety bond with written power of attorney attached, 2) cash bond, 3) property bond or 4) irrevocable letter of credit.
The first step to getting a surety bond is to find a surety provider that best meets the company's needs. The surety industry's leading providers offer online services to help Tennessee contractors get the surety bonds they need as quickly and easily as possible. Contractors can fill out online applications in just a few minutes.
Surety providers will conduct a thorough background check to decide whether an applicant qualifies for a contract bond. This typically involves an examination of the applicant's financial history, credit score and work record. If a business shows signs of financial instability or poor performance, the surety provider will simply refuse to issue the bond. If a contractor fails to secure the necessary bond(s), the business will not be able to legally work on the project. Ignoring surety regulations can result in heavy fines, legal action and license revocations.
Once a business secures the bond, it makes a legally binding promise to fulfill the bond's contractual language. This typically means the contractor agrees to finish the project at hand according to contract.
Although it might seem complicated, the goal of the surety bond process is twofold:
Since surety bonds play such an important role in Tennessee's construction industry, a basic understanding of their functionality can help contractors undergo the process much more easily.
Danielle Rodabaugh is the editor of the Surety Bonds Insider, a publication that provides in-depth analyses of developments within the surety industry. The publication is sponsored by SuretyBonds.com, a nationwide surety bond producer that helps contractors and their lawyers understand the legal implications of the surety bond process.
Danielle Rodabaugh, Surety Bonds Insider
The understanding most contractors have of surety bond legalities typically doesn't go much further than the fact that they have to buy bonds before beginning projects. Unfortunately, all too often contractors only really learn about surety bonds after a claim has been made and they're in the the midst of a lawsuit. This article will explore some key legal points that local contractors should know about Tennessee surety bonds.
What exactly are surety bonds?
Surety bonds are not insurance policies. Although insurance companies almost always underwrite surety bonds, they do not function in the same way. Insurance agents expect claims to be made against insurance policies. Conversely, surety providers do not expect claims to be made against bonds, and, if they are, the surety expects the contractor to pay for costs.
Surety bonds are risk mitigation tools that are used to reduce instances of fraud and malpractice across a number of different industries. In the construction industry, surety bonds are also called "contract bonds" or "construction bonds." Government agencies require the use of specific construction bonds that vary depending on the project type and its geographic location. Common ones include bid bonds, performance bonds and payment bonds, just to name a few. No matter the specific bond title, though, they all work in the same basic way.
How do surety bonds work?
Each surety bond that's issued essentially functions as a legally binding contract that joins three entities together.
- The principal is the contractor or construction firm that purchases the bond to guarantee the quality of future work.
- The obligee is the government agency or other project owner that requires the bond to protect against financial loss.
- The surety is the agency that executes the bond and acts as an intermediary between the principal and obligee.
If a principal fails to meet the bond's terms, then the obligee can make a claim on the bond to gain reparation. If the claim is found to be valid, the surety will be held responsible for paying the claim. The surety then expects the principal to repay the agency for all costs, which is a major distinction between surety bonds and insurance policies.
Who benefits from surety bond protection?
Generally speaking, contractor bonding provides legal protection to government agencies and other project owners who fund a construction project. Most contract bonds are required in case a contractor leaves a project incomplete or does unsatisfactory work, in which case the obligee can make a claim on the bond. Who exactly receives the bond's financial protection, though, depends on the bond's language. For instance, payment bonds actually protect subcontractors and material suppliers by guaranteeing they will be paid for their services.
Which laws require contract bonds in Tennessee?
A number of different laws regulate the use of surety bonds in Tennessee. For starters, the federal Miller Act requires the use of separate payment and performance bonds on every publicly funded project that's contracted for $100,000 or more. The Tennessee Board for Licensing Contractors does not require construction professionals to post a surety bond to get a contractor's license, however, surety bonds can be required for bidding or obtaining contractor permits from local government agencies in the state. Exact contract bond requirements vary by jurisdiction, so contractors should check with the government agency that enforces local construction regulations before beginning any project.
Surety bonds and the Tennessee home improvement contractor license
To get a home improvement contractor license in Tennessee, applicants must provide original proof of $10,000 worth of financial responsibility via either a 1) surety bond with written power of attorney attached, 2) cash bond, 3) property bond or 4) irrevocable letter of credit.
How do contractors get a Tennessee surety bond?
The first step to getting a surety bond is to find a surety provider that best meets the company's needs. The surety industry's leading providers offer online services to help Tennessee contractors get the surety bonds they need as quickly and easily as possible. Contractors can fill out online applications in just a few minutes.
Surety providers will conduct a thorough background check to decide whether an applicant qualifies for a contract bond. This typically involves an examination of the applicant's financial history, credit score and work record. If a business shows signs of financial instability or poor performance, the surety provider will simply refuse to issue the bond. If a contractor fails to secure the necessary bond(s), the business will not be able to legally work on the project. Ignoring surety regulations can result in heavy fines, legal action and license revocations.
Once a business secures the bond, it makes a legally binding promise to fulfill the bond's contractual language. This typically means the contractor agrees to finish the project at hand according to contract.
Although it might seem complicated, the goal of the surety bond process is twofold:
- keep financially unstable or otherwise unqualified construction professionals from working in the market
- protect government agencies, project owners and consumers from financial loss
Since surety bonds play such an important role in Tennessee's construction industry, a basic understanding of their functionality can help contractors undergo the process much more easily.
Danielle Rodabaugh is the editor of the Surety Bonds Insider, a publication that provides in-depth analyses of developments within the surety industry. The publication is sponsored by SuretyBonds.com, a nationwide surety bond producer that helps contractors and their lawyers understand the legal implications of the surety bond process.
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