Types and Definitions of Bonds

May 15, 2015  |    Posted by Lisa Post, Owner & Bond Expert

  1. Bond Definitions
    1. Agent or Producer: Edward J. Post Company
    2. Owner or Obligee: the municipality or governing body
    3. Principal: the bond applicant, i.e. developer, builder, merchant (you)
    4. Contract: the job specifications
    5. Guarantor or Surety: the insurance company
  2. Contract Bond Types
    1. Bid Bond
      1. Definition: assures that the bid is submitted in good faith and that the Principal enters into the contract at the price bid and provides the required performance and payment bonds
      2. Provides the Obligee with confidence that the Principal is serious about getting the job and financially capable of completing the project and that the Guarantor stands behind the work
      3. Pre-qualification process: CAT
        1. Performance capacity
        2. Financial strength
        3. Track record
        4. Company history
        5. Organizational structure
        6. Reporting Business continuation plans
        7. Trade references
        8. Analysis of all projects in process
        9. May require your personal financial information as an owner of the construction firm
    2. Performance Bond
      1. Definition: protects the Obligee (owner of the project) from financial loss should the Principal fail to perform the Contract in accordance with its terms and conditions
      2. Assures that the Principal (you, the contractor) and all subcontractors will complete a project to the exact Contract specifications
      3. Prevents financial loss for a project owner should a contractor not satisfactorily complete the job
      4. Problem with the Project because of inadequate performance
      5. Wronged party files a claim on the bond
      6. Surety that issued the bond will validate the claim and make all parties whole
      7. Legally binding contract among three parties:
        1. Principal (you, the contractor)
        2. Obligee (entity that you have the contract with)
        3. Surety / Guarantor (company supporting the bond)
    3. Payment Bond
      1. Definition: Ensures that subcontractors will be paid according to the terms established in the contract and applicable laws in the state in which the contract is being performed
      2. Since a mechanic’s liens cannot be placed against public property, this bond may be the only protection claimants have if they are not paid for the goods and services they provide to the project
      3. Private jobs also involve a Payment Bond to be able to extend protection to the subcontractors and suppliers. This can help when negotiating prices from subs and suppliers because they know they will get paid.
    4. Labor & Materials Bond
      1. Definition: Issued with (and for the same amount as) a Performance Bonds, and covers payment for all equipment, labor, materials, and services in the event the Principal fails to pay for them under the terms of the contract Posted to guarantee payment for the labor and material used
      2. Similar to Payment Bond
    5. Maintenance Bond
      1. Definition: Guarantees against defects and according to the contract terms and without errors for a specific time period following a project’s completion
  3. Site Performance Bond
    1. New Development Bond
      1. Definition: Protects the Obligee (usually the local governing agency) from financial loss should the Principal fail to complete the Contract
      2. Agreement under which the Surety guarantees to the Obligee that the Principal will perform a Contract in accordance with the terms and conditions of the contract agreement
      3. Integrity of the Principal must be investigated before underwriting
      4. Four C’s evaluated: Character, Continuity, Capital, Capacity
      5. Review of references, experience, ability, financial strength, credit history, established relationships, and lines of credit.
    2. Individual Lots Bond
      1. Guarantees performance of the site improvements to the Obligee (usually the local governing agency)
      2. Protects the Obligee from financial loss should the Principal fail to complete the improvements
      3. Integrity of the Principal must be investigated before underwriting
      4. Four C’s evaluated: Character, Continuity, Capital, Capacity
      5. Review of references, experience, ability, financial strength, credit history, established relationships, and lines of credit.
  4. Commercial Surety Bond
    1. License & Permit Bond
      1. Definition: Designed to protect consumers by ensuring that businesses perform their jobs according to the rules and regulations set forth by local, state, and federal governments
      2. Most common types of bonds
      3. Required to do business
    2. Court Bond
      1. Bond to protect estates of deceased or incompetent individuals to assure proper disbursement of the estate
    3. Notary Bond
  5. Miscellaneous Bond
    1. License Bond
      1. Definition: type of commercial surety bond required by governmental regulatory authorities usually in the form of a license to engage in the activities they regulate
    2. Permit Bond
      1. Definition: Required by state law, municipal ordinance, or by regulation and in some instances by the federal government or its agencies to guarantee that a contractor who has been issued a permit complies with the laws and ordinances regulating the privilege for which the permit was issued
    3. Street Opening Bond
      1. Definition: Required if a street is being disturbed by construction
      2. Each municipality, state, or government party requires the bond in a unique and specific format
      3. The Obligee determines the dollar amount to assure that the street is brought back to pre-construction form and that the improvements hold for the maintenance period in case the applicant does not fulfill their obligation to complete and maintain the street opening/improvements
    4. Court Bond
      1. Definition: Required to protect consumers from the financial loss that could come with the result of a court
      2. Appeal Bond
        1. If a judgment is appealed, guarantees that the payment of the original judgment will be paid if the appeal fails
        2. Normally requires 100% collateral
      3. Custodian Bond
        1. Protects the rights of minor children (or those who are not mentally capable of taking care of their own interests/assets) to ensure that an appointed custodian will correctly manage the finances of the individual
        2. a.k.a. Guardianship Bond
      4. Executor Bond
        1. Required by the person responsible for distributing a dead person’s estate if the will does not excuse the protection of a bond or no will exists
        2. Protects the deceased’s assets and liabilities
        3. a.k.a. Probate Bond or a Fiduciary Bond
      5. Cost Bond / Injunction Bond / Replevin / Attachment Bond
    5. Subdivision Bond
      1. Definition: Ensures that the subdivision’s improvements will be made according to the governing body’s engineer’s letter of instruction outlining the improvements
    6. Notary Bond
      1. Definition: Protects those who work with notaries from fraud and any other errors related to their work and deters notaries from unethical conduct while performing their duties
      2. Serves as a risk management tool
      3. If a notary makes a mistake, a claim can be filed against the bond so that the Obligee can receive financial reparation
    7. Mortgage Broker Bond
      1. Definition: Protects the consumer in the event of wrongful practices or fraud on the part of a lender or broker
      2. Wrongful practices include:
        1. Knowingly approving a borrower for a loan for more than he or she can afford to repay
        2. Encouraging a buyer to commit fraud on an application
        3. Putting pressure on buyers into purchasing certain loan products
        4. Establishing an interest rate on the basis of anything other than the borrower’s credit history
        5. Charging unnecessary or additional fees
        6. Deliberately going after vulnerable or at-risk buyers and suggesting cash-out refinances
        7. The amount of the bond depends on the average amount of mortgage loan volume serviced in a year and the state in which business is conducted
    8. Motor Vehicle Dealer Bond
      1. Protects consumers against fraudulent actions by an auto dealership and requires compliance by the auto dealer with all laws and tax regulations
    9. Sales Tax Bond
      1. Guarantees that a business (such as a car dealership) will pay the anticipated sales taxes on yearly acquisitions/sales
      2. Considered a financial guarantee surety bond obligating the Surety to pay a certain amount of money at a future date if the Principal fails to pay collected funds to the Obligee or if there is incorrect reporting

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With the current economic credit situation and stricter underwriting, choosing the right bond agent/agency has become extremely important. Post Surety Bonds can help pixyou get the bonds and the value you need. Give us a call at (609) 953-BOND (2663), email us, or complete the form on this page with your inquiry.

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