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Top Five Insurance Questions about Surety Bonds

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Alex Dopazo

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In this blog we’ll review the top 5 questions we usually receive about surety bonds.  We understand the confusion that may exist surrounding surety bonds, so we’ve simplified as much as possible, so you can make the best decisions you can for your projects.  

What Is A Contract Bond? 

You get a contract bond through an insurance agency, so it must be insurance, right? 

No. 

Yes, we know Insurance is confusing and getting a bond is no exception.  

A contract bond is in simplest terms, a promise of completion. You are signing an agreement that you will finish the project within budget and time constraints. The penalty being having to pay out the bond.  

If you need a contract bond, what are the necessary things to get the process going? First is financial Information about the business owners, their spouses and the business itself.  You’ll also need the bond from, which if it’s municipal work, should be included in your bid packet.(Link to packet or info about packet) Finally, information about the contracts.  

Why Is Your Credit Score Important For A Surety Bond? 

You might not have to worry about your credit score with insurance, so you should be fine with a bond too, right? 

Not so fast.  

As we explained earlier, bonds are quite different from insurance, and that means different requirements. Insurance is for lack of a better term like a bet. You’re paying a premium and the “bet” is that some sort of damage will happen to your asset within the covered risks. The insurance company is “betting” there will be no incident, therefore keeping the premium. (https://www.lloyds.com/about-lloyds/our-market/how-insurance-works)  

Surety and contract bonds are a promise. 

It’s a promise that a project will finish to specifications and that the people who work on that project will be paid. Much like when you make a purchase with credit, it’s a commitment to pay it later on.  

So that’s where you and your spouse’s credit history come in. Your credit history indicates how good you are at keeping your “promises”. Therefore, good credit is very important in acquiring a bond. 

How Long Does A Contract Last? 

While an insurance policy has a set term, usually a year from inception, bonds do not have a set time frame. Instead, A bond begins the day it is issued and ends once the project is verified to be complete by the company you had been contracted by. Once you’ve submitted the information to the bonding company and they agree that the project is done up to the terms agreed, they grant a release from the bond.  Then you provide that release to the surety company.  

Now you may ask as a follow up, how many bonds can I have going at the same time? You have to think of it like a line of credit as mentioned earlier. You don’t want too may lines open and neither do creditors. Same applies to bonds. 

What’s a Bid Bond?  

A bond pregame? 

Not quite, but kind of.  

 A bid bond is actually not a bond at all. (Yes, the confusion continues, sorry). 

Instead, a bid bond is a piece of paper which states that in the event the client is chosen to take on the project, the insurance company is willing to issue the actual bond.  Now, that isn’t a guarantee, merely an indication that the insurance company would do it.  

Usually what this does is speed the bond process, since most of the underwriting has been done. There is a clear advantage to getting a bid bond, it just has to be understood that it isn’t a done deal.  

How Much Is A Contract Bond? 

“What’s it going cost me?” 

The ever-present question in all businesses.  With contract bonds it’s no different. So, what’s it cost?  

Let’s do the math. 

Let’s say the overall cost of the project is $300,000, the cost of the bond would be 3% (the usual percentage for a bond) of that cost. A project that costs $300,000 would be have a premium of $9,000. 

It’s important to note that you are only charged if you are selected to do the project. You won’t be charged if it’s a pre-bid bond and you lose out on the opportunity.  

We hope this helped you in understanding how Surety Bonds work. Need further clarification? Did we miss anything? Let us know in the comments or contact us directly! 

Also look at our other blogs for more education about insurance topics. 

About Blog Author

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Alex Dopazo

In 1998, Alex Dopazo, joined his father at the agency and fell in love with insurance. It sounds corny, yes, but we love insurance and how it can help our customers. Together we share that love with all of our customers who eventually become friends.

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