Frequently Asked Questions

 

General Questions

What is a principal?

The principal is the party (such as the business or individual) who bears the primary responsibility for a bonded obligation and who has the duty to perform or fulfill an obligation for the obligee’s benefit.

What is an obligee?

An obligee is the party to whom a bond runs in favor of and who is protected against certain types of loss if the principal defaults on its bonded obligation.

What is a surety bond?

A surety bond is an agreement in which one party (a surety) guarantees another party’s (such as a business or individual) performance or obligation to a third party (the government agency or court for example). Many federal, state and municipal government agencies require license bonds in order to operate a business. Bid bonds are required for businesses and individuals in order to bid on contracts. Performance and payment bonds are required before being awarded a contract. In addition, many courts require bonds to be posted in connection with various legal proceedings such as probate bonds, guardianship bonds, trustee bonds, receiver bonds, appeal bonds, and temporary restraining orders.

What is the surety (as an entity i.e. The Service Insurance Company, Inc)?

The surety is obligated to perform or fulfill the obligation in the event of the Principal’s failure to perform its obligations (default). The surety is typically a licensed insurance company.

What is surety (as a concept)?

Surety is a form of credit much like how bankers extend in the form of dollars loaned or as a commitment to a loan. Bankers granting loans fully expect to have the loans repaid. The same applies to suretyship, where the surety expects to be repaid for any losses incurred as such, in addition to other requirements, Principals will be required to sign an indemnity agreement guaranteeing that they will pay back any losses to the surety.

Why should I get a surety bond?

The surety bonds will allow you to have the opportunity to undertake the obligation that the Surety Bond will be backing up. If you don’t get the bond, you can’t bid on the project which requires bonding. For example:

  • Bid bonds: They help to act as a pre qualifier for those bidding on projects. The bid bond helps to cover the costs of rebidding should the low bidder not enter into the contract or go to offset the cost to the 2nd bidder to cover part of the bid spread.
  • License bond: If you don’t get a bond to operate your business such as a license bond, you may not legally be able to operate your business if a license bond is required for your business by your municipality or state.
  • Performance bonds: guarantee that the contractor aka principal will perform the contract terms and specifications. It is important that the principal has a clear understanding of all of the terms and conditions of the contract.
  • Payment bonds: guarantee that the contractor aka Principal will make payments according to the contract terms and conditions which include labor, material suppliers and subcontractors.
  • Maintenance bond: Guarantee that the contractor aka principal will repair and replace defective material or due labor. The contract will provide the duration required and it is important to disclose this information to the surety.

Can I get a performance bond, payment bond, permit, license or bid bond if my credit is poor ?

Yes, it is possible to get bid bonds, permit bonds, license bonds, payment and performance bonds if your credit is poor. At The Service Insurance Company, Inc , our underwriters evaluate more than just credit scores. We are not robots and will work with you. We want to find out why your credit is poor. If this negative credit item(s) have been fixed, this will help in obtaining the bond. We want to know how it has been “fixed” and you will need to prove that there was an event in your life that caused the poor credit score. If you can show that the liens and judgments have been paid, this will help your case.
The other important items we look at in our underwriting evaluation include, your prior experience, your key employees, your cash in the bank and bank credit line availability.

What is an Indemnity Agreement, General Indemnity Agreement or Agreement of Indemnity and why is it important to understand what it is?

Under the Indemnity agreement , the Surety will seek to collect the costs and expenses it expended relating to the claim. These expenses would include the payments to the subs and suppliers for the unpaid balances along with consulting fees, engineering fees, legal fees and other expenses the surety incurred to settle the claim. Surety bonds are not a typical form of insurance in that if there is a claim or loss, the principal (The party taking out the bond, obligated to perform or comply) has the primary responsibility and as such takes the risk associated with the obligation. The surety, does not expect to incur the loss and the indemnity agreement is a pledge that in the unfortunate event that loss occurs, the principal will reimburse the surety for the loss and the related expenses.

For example, assume a bond performance and payment bond was issued for a construction contract and the contractor’s bid was too low. Midway through the contract, the contractor realizes that the job will end up costing the contractor to complete the project for a loss. The contractor was having cash flow problems and was unable to pay for the subcontractors and suppliers that furnished work and materials to the project. Those subcontractors and suppliers have the right to file a claim on the payment bond to be reimbursed for the work and labor performed on the project. At the same time, should the contractor not have the resources to complete the project, the surety would step in and have the option to complete the project or make a monetary settlement.

Why does my wife / husband have to sign the indemnity agreement when she / he does not own the business and has no involvement in the business?

Typically, personal indemnity is required because most small businesses such as Subchapter S corporations make distributions to the owners of the companies or LLCs so that most of the profits flow to the individual owners. Therefore in many cases, the business (principal) does not have the assets to reimburse the surety for the costs of the claim and the surety must seek to be reimbursed by the individuals (personal indemnitors). It is much more costly and time consuming for the surety to enforce an indemnity agreement when the spouse does not sign the indemnity agreement so spousal indemnity is therefore typically required . It is important to also keep in mind that the costs and expenses to the surety to enforce the indemnity agreement, such as legal expenses, will be passed along to the Principal especially if the Principal does not cooperate with the Surety.

It is our recommendation that the Principal carefully review the indemnity agreement with a qualified attorney just as the surety (The Service Insurance Company, Inc) would expect that the Principal would fully review and evaluate the the contract specifications or the obligation that the surety bond is guaranteeing, before entering into a Surety bond arrangement as the principal.

Contractor Bond Questions

What is a bid bond?

A bid bond is a guarantee that the contractor “Principal” bidding on a contract will honor the bid commitment if the contract is awarded to that bidder. Typically the bid bond is for 5% or 10% of the overall contract amount depending on which state or municipality is the “ oblige” this being said, we see some bid bond requirements in excess of these percentages. We also see some capped off $20,000 as s we see on typical NJ bid requirements. If the contractor does not honor their bid and tries to back out after the award of the contract, the Principal will be obligated to pay the obligee up to the amount of the bid bond depending on what the next bidder bid which is the difference in the bid price not to exceed the bid bond amount.

What is a performance bond?

A performance bond guarantees that the principal (contractor) will complete a contract in accordance with all of the contract terms and conditions and specifications. It provides default protection in favor of the obligee (federal government, state, municipality, private developer or contractor). If the principal does not complete the project or constructs it defectively, the surety may need to step in and fulfill the obligation if the principal is not able to do so.

It is important that the principal have a full understanding of what is being required. These can be amounts of insurance that are required, labor pay scale such as prevailing labor rates which may vary from state to state, living wages, which may vary from municipality to municipality, record retention requirements, delay damages if the contract is not completed on time, consequential damages if the contract is not completed on time and maintenance requirements and duration. If principal does not know the cost of the liability insurance required in the contract before the bid and the cost of the additional insurance required by the obligee was in excess of the original estimated job costs, there may a loss of profit on the project.

The principal is typically required to furnish a performance and payment bond that go hand in hand with each other. The payment bond component guarantees that suppliers and subcontractors working for the Principal will get paid. It is always good to work for a contractor that is bonded if you are working as a subcontractor or supplier if there is a performance and payment bond in place since there is a better chance of getting paid on the project. This being said, it is important to have a full understanding on when and how to file a claim for payment and it is best to consult with a qualified law firm. Waiting to file a claim may cause the claim to be denied. Laws vary from state to state but if your claim is not filed timely and in the format required by law, your claim will be denied.

What do I need to get started on a bid and performance bond?

To get started, one typically needs

  • Contractor’s questionnaire
  • Corporate and personal tax returns
  • Most recent year end corporate financial
  • Bank statements from the last three months
  • Bid specifications and special forms if applicable
  • Bond Request form

What is the cost of performance and payment bonds?

The rate for bonds varies based on the size, scope and duration of a contract and the experience, credit rating and financial condition of the applicant. You must apply for a bond to obtain a rate quote.

What is a maintenance bond?

A maintenance bond is an obligation that requires the principal to fix and correct construction defects relating to materials and labor for a certain period of time after the project closes out. Some obligations may require active maintenance which would be over and above existing material and workmanship depending on the contract terms and conditions in where the principal has to actively participate in maintaining the improvements constructed and installed. Some obligees may require excessive maintenance periods which pose a financial burden if the principal does not factor those costs into the contract.

An example of an excessive maintenance period would be a period of three or four years for repainting a bridge. The principal should factor in the repair costs which would include mobilization, special scaffolding or other lift equipment to make spot repairs which would be very costly. The maintenance bond would pick up this exposure and the liability if the repairs were not performed by the principal.

The consent of surety obligates the surety into issuing a performance bond for the required amount of the performance and payment bond as as required in the contract specifications. These are typically for 100% of the contract value.

Court Bond Questions

What is a license and permit bond?

License and permit bonds are required by the state, municipality or other public body as a condition to granting a license or permit to engage in a specified activity or to operate a business. This bond guarantees that the business or party seeking the license or permit will comply with applicable laws or regulations. These bonds can provide protection to the public or consumers who sustain injury or damage as a result of the principal’s activities as described in the license or permit when such a guarantee is required. Here are some examples of typical license and permit bonds:

  1. Auto dealers or used car dealer bonds: Provide limited protection to consumers that purchase vehicles from the dealership. This could include consumer fraud issues, the dealership charging in excess of regulated fees and failing to cover repairs as outlined that the dealership is responsible for.
  2. Tuition bonds: Will cover consumers for limited reimbursement on tuition paid to private schools that go out of business.
  3. Road and sidewalk opening bonds or road restoration bonds: Will protect the public if the property owner fails to repair and restore sidewalks and roadways to acceptable and safe conditions after work such as sewers or electrical lines were installed. The bond would pay for the cost of the restoration.

What is an appeal bond?

Before courts agree to hear a case on appeal, the businesses or individuals are required to post an appeal bond in the amount of the judgment or in some states the amount of the judgment plus costs. The appeal bond is posted to guarantee the original judgment will be paid in full plus costs including interest if the appeal is denied. Appeal bonds are typically written with cash collateral. Detailed financial statements are required. Collateral may be waived or reduced depending on the financial condition and credit of the applicant.

Does The Service Insurance Company, Inc write release of lien bonds?

The Service Insurance Company, Inc writes release of lien bonds. The release of lien bond is issued typically when a real estate owner has a dispute with a contractor over a payment that is due to the contractor. The release of lien bond allows for the release of the lien so that the title to the property is cleared and allows for time for the dispute over the payment to be adjudicated.

What is a probate bond? What is an administrator bond?

Probate bond and administrator bond are interchangeable terms for bonds required of individuals appointed by the court to close out an estate where there is no will. The bond guarantees that the estate will be probated, assets sold, debts paid and the residual distributed among the heirs and the required forms completed to close out the estate.

How do I get a Probate Bond? Can I get a Probate Bond with poor credit?

Probate bonds are fairly easy to obtain, we look at the character and credit of the applicant and the complexity of the estate. If there are any ongoing disputes that need to be resolved are all factored into the underwriting. The Service Insurance Company, Inc writes probate bonds and will evaluate each case on its own merits, even if the applicant has a low credit score.

Is cash collateral always required when posting an appeal bond?

In most cases cash or bank letter of credit is required for collateral for appeal bonds, but from time to time The Service Insurance Company, Inc will waive collateral requirements depending on the financial resources and credit of the applicant or principal. Detailed financial information will be required.

Does The Service Insurance, Inc write guardian bonds? What are guardian bonds?

The Service Insurance Company, Inc writes Guardian Bonds. Guardian bonds are surety bonds that help to provide protection for those that are not able to administer their own affairs such as minors or incapacitated people. The court appointed guardian must help to provide care and manage the financial affairs for those individuals and provide accountings as required by the court.

Is cash collateral always required when posting an appeal bond?

In ovide accountings as required by the court.

Does The Service Insurance, Inc write replevin bonds? What are replevin bonds?

The Service Insurance Company, Inc writes replevin bonds. Replevin bonds are required when there is a legal dispute over property held by or wrongfully taken by another party. Replevin bonds allow for the parties involved in the dispute to adjudicate the matter. If the replevin action was improper, the principal on the bond must pay court costs and other costs and damages associated with the replevin action. The Service Insurance Company, Inc will require detailed financial statements as part of the underwriting on this type of bond undertaking.

Does The Service Insurance, Inc write temporary restraining order bonds (TRO bond)? What are TRO bonds?

The Service Insurance Company, Inc writes TRO Bonds. These surety bonds are required when a restraining action occurs. Cases may involve intellectual property customer lists in where an action is started to restrain a former employee from using prior customer lists. If the court decides that the restraining order should not have been granted, the principal on the bond will be required to pay back court costs and damages which relate to the restrained party incurred. Detailed financial information is required as part of the underwriting for this class of bond.

Commercial Bond Questions

Does The Service Insurance, Inc Company write lost instrument bond or lost security bond or open penalty bonds? What are they?

The Service Insurance Company, Inc writes lost instrument bonds freely with the standard commercial application. These bonds are required when a party needs to replace missing certificates which could include lost checks, lost stock certificates or lost coop certificates.

What does a lost instrument bond cost?

The Service Insurance, Inc Charges between 2.5% to 3% of the value of the lost certificate and not less than the bond amount.

What is a New York nail salon bond?

In order to hire workers in a nail salon in New York, it is required to have a NY Nail Salon bond. The bond guarantees wages to Nail Salon workers. Information on the bond must be accessible to the workers.
According to NY State Division of Licensing Service:

 

  • At least $25,000 if you employ the equivalent of two to five full time individuals who provide nail specialty services.
  • At least $40,000 if you employ the equivalent of six to ten full time individuals who provide nail specialty services
  • At least $75,000 if you employ the equivalent of 11 to 25 full time individuals who provide nail specialty services
  • At least $125,000 if you employ the equivalent of 26 or more full time individuals who provide nail specialty services.