Thursday, June 27, 2013

OK, SO WHAT EXACTLY IS A BONDING COMPANY?

As the leader in providing surety bonds (bid bonds, construction bonds, etc.), it is not uncommon that we get questions from people wanting to know exactly what a bonding company is, so we thought that we’d give you some information that could be worthwhile.

Bonding companies typically provide several lines of insurance, such as Errors & Omissions (E&O) insurance or Property & Casualty insurance as well as bonds.

We are going to focus on the bond side of the business as this is what the bonding company is all around. A bond’s formal name is surety bond.  It is written by an insurance coverage company via an insurance coverage firm.  Swiftbonds, as you’ve probably already guessed is a bonding insurance coverage agency. Just like all insurance coverage firms, there is a need for a certified insurance policy representative that helps the company.  We were selected to help service bonds by the insurance coverage company that underwrites the bond.

A surety bond is a contract among three separate parties: The principal (that’s you, the contractor), the obligee (the general contractor or agency), and the surety (the insurance company that makes certain that the principal’s commitments will be done).

Pursuant to this arrangement, the surety agrees to uphold the contractual assurances made by the principal if the primary obligor fails to uphold its guarantees to the obligee. In plain language, if you are unable to finish a job, the insurance company can either get someone else to finish or pay damages, etc.

The principal pays a premium for the bonding company’s financial stability in the form of a surety bond. If there happens to be claim and it turns out to be a legitimate claim, the surety will pay it and, after that, resort to the principal for repayment of the claim and any kind of lawful charges sustained.

Can anyone be a bonding broker/agent?

No. A bonding company will not contract with just anybody off the street.  A bonding agency is truly an insurance firm and should be staffed by accredited Insurance policy Agents. Bonding Companies are governed by the very same strict specifications as all insurance firms and follow state statutes established for insurance policy business.


OK, SO WHAT EXACTLY IS A BONDING COMPANY?
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Tuesday, June 25, 2013

About Surety Bonds

A surety bond is a particular type of bond that involves three different parties.  These are the principal (the entity being secured against default), the obligee (the entity who has the rights to the money or service owed), and the surety (the entity promising to shoulder the liability in case the principal defaults.


There is a wide range of circumstances or situations where this type of bond can be used.  Basically, a surety bond is used every time a group or an individual is expected to perform something, and an additional assurance of compliance is required.


How It Works


The principal signs an agreement with a surety company (normally an insurance underwriter or company like Swift Bonds) that makes a promise to reimburse the surety in case the obligee defaults or fails to pay.  In this case, the surety gives the obligee the agreed amount.  This then results to a legal obligation of the principal to reimburse the company.  This may include all expenses and losses incurred by the surety in relation to the case.


Since the insurer is a lender, it acquires the same rights in recovering its losses from the principal like what any lender has; and this is unlike a typical insurance transaction where an insurance company has significantly less options as far as legal recourse is concerned.


Types of Surety Bonds


There are many types of this bond including court bonds, contract bonds, license bonds, and bail bonds.  Swiftbonds does not write any court or bail bonds.  We focus solely on bonds for contractors.


Contract bonds – required of a contractor who is obliged to do a particular building or maintenance job. The contract may stipulate various specifications, timeframe for completion, and maximum cost, the surety may be required to appropriately fulfill the contract.


Court bonds – usually court-required prior to a principal’s attempts to file an injunction or claim, or an appeal. If the principal fails, they may be required by the court to shoulder the court costs or even a fine in case of wrongful filing.


Bail bonds – This is one of the most popular types of surety bond, although one that a lot of banks and insurance companies want nothing to do with primarily because of its notoriously high default rate. This basically requires the principal’s appearance at a set court date, and usually costs higher since only a few specialists are willing to issue such a bond.


License bonds – usually required for start up businesses or when acquiring a new kind of license for an already existing business.  In this case, the principal is the owner getting a surety for compliance with all the licensing requirements.  The local government or the state is the obligee issuing the license, and gets paid in case the principal does not act in accordance with the licensing requirements.


There are other types of surety bonds other than those mentioned above.  These include permit bonds (similar to license bonds), public official bonds (to make sure that the elected or appointed official will act lawfully), and probate bonds (for executors handling the assets of a minor or an estate).


About Surety Bonds
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Friday, June 21, 2013

Surety Bond for Contractors

A contractor’s surety bond is an agreement between the contractor, client and a surety issuing company.  The contractor is also referred to as the bond principal, while the customer is referred to as the obligee.  In most states, the contractor is required to be bonded before a license can be issued.  Big projects normally require a specific bond that covers only that particular project.

Functions of the Bond

A surety bond for contractors offers a financial assurance that the contractor will do the job correctly and in a timely manner. In case the contractor fails to make good on his obligations, the insurer will pay a pre-determined amount to the client.  The bond may also include reimbursements for damages to properties due to the fault or negligence of the contractor, unpaid materials suppliers or subcontractors, and stolen or lost materials.

Significance of the Bond

The bond helps in attracting clients as they are given more assurance on the contractor’s capability to finish the job.  This is important when you are dealing with a new client who is not sure about the contractor’s quality of work.  Suppliers and subcontractors may likewise prefer working with a bonded general contractor simply because there is assurance that they will receive their payments as stipulated in the contract.

Bond Amount

The amount of premium for a contractor’s surety bond is primarily based on the surety’s risk assessment and the bond’s payout amount.  The underwriter will analyze the history of contractors as far as relationships with owners, suppliers, subcontractors, architects, and engineers are concerned. The contractor’s current net worth is also considered in determining the bond’s failure risk probability.

A contractor who has a significant amount of assets under his name is more likely to finish a job compared to one who is struggling to even meet his monthly payroll requirements.  A bond amount is set depending on the available employees and equipment at the contractor’s disposal that are indicative of the company’s delivery potentials.

Important Considerations

When in need of surety bonds, contractors should shop around first as rates may vary between providers. Some companies offer higher limits that allow contractors to place bids for bigger projects. The surety company’s reputation and financial strength are also important. Clients and suppliers may sometimes be hesitant to work with contractors whose bonds are issued by unknown companies.

Filing a Claim

In general, contractor’s bonds require obligees to file pre-default notices in order to give the insurer an opportunity to avoid defaults. A meeting is initially scheduled between parties involved in the default such as the client, surety, contractor, and concerned suppliers and subcontractors. If it becomes apparent that the parties will not come to an agreement to complete the job, the surety may, at its discretion, decide to finish the task or bring in another contractor.

If it is merely a question of funding, the insurer may loan or advance the amount to the contractor so he can complete the job.  However, when default is inevitable, the surety company is required to pay out what is stipulated in the surety bond.

Surety Bond for Contractors
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