Your surety bonds serve as important financial guarantees to your contracting clients. These clients don't expect to lose money by working with a contractor. Bonds can help you assure them they won't take a loss on their investment. By paying attention to the bond you have, you can ensure that you always keep it active.
What are Bonds?
Bonds essentially guarantee clients (obligees) that you (the principal) can repay them if you can't finish a job they contract you to do.
If you cannot complete your work, the obligee can make a claim on your surety bond. The surety company that issued the bond will then ensure that the client receives payment for their lost costs. However, the bond holder will need to reimburse the surety company for the claim. This is how bonds differ from insurance policies. Even if you carry a bond, you must repay the claim costs.
The Value of Bonds
It is important for bond carriers to have bonds of adequate value. Bonds stipulate a certain value against which an affected client can make a claim. The value of the bond will likely vary widely. Often, the industry, contract stipulations and other factors determine the bond's value. Sometimes, obligees stipulate the terms of a bond. In other cases, bond carriers have more leeway to determine value. Nonetheless, always make sure you have adequate funds attached to the bond.
Maintaining Bond Costs
Like insurance policies, bond carriers have to pay to maintain their coverage. A bond's premium is generally worth a percentage of the bond's total value. However, this will vary, depending on the surety company's rules. For example, a one percent premium on a $500,000 bond will equal $5,000. You can usually work out a payment plan with the surety company. Some bonds may allow monthly payments, while others will require an up-front payment.
Your surety bond will generally stay active for a term, similar to an insurance policy. Bonds may last for one year or multiple years. Sometimes, principals can renew their bonds, while in other cases, they must obtain a new bond. Which option is correct likely depends on the rules of the bond and the party requiring it. At times, you may not have to renew a bond at all. This is because the obligee will no longer require the bond.
To determine how to structure, maintain and renew your bond, talk to your surety agent and obligee. They can help you better understand your needs.
Ready to get a bond? Atlantis Insurance can help. Get in touch with us for more information.