CGIC Surety Bond Insurance
Surety bonds – Surety bonds are three-party agreements whereby one party (the surety company) guarantees to a third party (i.e. the owner) that the other party (the contractor) will perform the contract. The owner specifies the bond requirement in the contract documents.
Parties involved in Surety Transaction
- Surety Company – guarantees certain obligations will be performed.
- Owner/Obligee – directly receives benefit of the bond
- Contractor/Principal – undertakes the obligations to perform the contract that is being bonded. The economic risk of the principal’s default stays with the principal, who must sign an indemnity agreement promising to reimburse the surety company for any claim on the bond plus related expenses and charges.
General Classifications of Bonds
- Contract Surety Bonds – refer to any bond that undertakes to guarantee the fulfillment of the principal’s obligation to a third party (the client). It includes construction, supply, delivery, installation and other service contracts.
- Judicial bonds – refer to bonds filed by the principal in accordance with statutory requirements.
- Bid Bond – provides financial assurance that the principal will comply with the conditions of the bid, including entering into a final contract. It also assures the obligee that the surety company will issue the requisite advance payment and performance bonds. If the contractor is awarded the contract but fails to enter into the agreement, the surety may be required to pay the difference between the awarded bid and the next lowest bid.
- Advantage Payment Bond – guarantees the obligee of recoupment or repayment of the advance payment granted the principal through deductions form progress billings. If the principal defaults and/or rescinds the contract, the full amount of the bond shall be forfeited in favor of the obligee.
- Performance bond – protects the owner from financial loss should the contractor fail to meet the terms and conditions of the contract. If the contractor defaults, the surety will respond in accordance with the terms of the bond.
- Payment bond –guarantees that the contractor will pay his laborers, materials suppliers, and subcontractors. Payment bonds issued by themselves only guarantee that the project will remain lien free for the obligations assumed by the principal. If the contractor fails to pay amounts properly due, the surety will make the payments up to the amount of the bond (stipulated in the contract)
- Warranty bond – guarantees that the contractor, in exchange for the release of the retention money, will make good his promise to correct defects that are discovered after a project has been completed. If the contractor fails to correct these defects, the surety will make payments up to the amount of the bond to correct said defects.
Ask for Quotation