Melanie Baravik is a contributor to the Surety Bond Insider, covering changes in the surety bond industry.
We recently checked in with Melanie to learn more about surety and license and permit bonds, and the importance of these bonds to those who work as contractors. Here’s what she shared:
Can you explain what a surety bond is and how they are used?
A surety bond is an agreement between three parties:
- The principal – the person buying the bond
- The obligee – the entity that requires the bond
- The surety – the company backing the bond and providing its line of credit
A surety bond is the principal’s guarantee that they will uphold the terms of their bond, complete certain tasks and obey the law. If they do not, the obligee can seek reimbursement by filing a claim against the bond. Valid claims are paid by the surety company up to full amount of the bond, and the principal must reimburse the surety for any claims paid.
What about license and permit bonds? What are they and who needs them?
License and permit bonds are required in many situations. For example, contractors in many states must purchase a license and permit bond as part of the licensing process. This bond guarantees that professionals adhere to state and federal laws and honor the terms of their license. If a license and permit bond is required, individuals cannot operate their business or provide services until they purchase the bond and become licensed.
Other businesses that often require the purchase of a license and permit bond include car dealerships, freight brokerages and notaries.
What are the risks to contractors who aren’t properly bonded?
Because surety bonds are usually purchased as part of the licensing process, contractors that fail to purchase bonds mandated by law are in danger of suspension or loss of their license. Some states’ penalties include hefty fines and even criminal charges for doing business without a license.
How should contractors (especially those involved with residential construction or home inspectors) be using surety bonds?
First, check with the agency in your state that regulates contractors. Find out exactly which bonds you’re required by law to purchase and obtain those first – usually license and permit bonds. States have differing bond requirements depending on the type of work being done, and there are several bonds contractors can purchase voluntarily. For example, maintenance surety bonds guarantee against defective materials and workmanship for a fixed period of time after project completion, but are rarely required by law.
What do contractors need to know about shopping for surety bonds? How can they determine what type of bond they’ll need?
Contractors should be aware that their bonds almost always require underwriting, meaning their premium is dependent on a review of the applicant’s finances – including credit score. Be aware that a low credit score will result in a higher premium. However, contractors can lower their premiums if no claims are filed on their bond and by improving their credit.
What are the most common mistakes contractors make when shopping for surety?
The biggest mistake is not knowing what bond or bonds they need, or being unaware of their finances. Surety professionals can usually figure out what you need, but it’s best to check with state agencies and be certain so no mistakes are made. An informed consumer can make an informed purchase.
What can contractors do to ensure they get the best rates for their bonds?
Shop your bond! Get quotes from several insurance companies before purchasing. At SuretyBonds.com, we work with several insurance providers to ensure you’re getting the best rate for your bond.
What trends or headlines are you following in the world of surety bonds – especially as they relate to residential contractors, appraisers or home inspectors?
More and more legislation is being passed requiring appraisal management companies to be bonded. In 2016, some states, including California, increased the license and permit bond required of contractors. Some Alabama contractors saw their bid bond increase this year (bid bonds ensure contractors do not purposely underbid on a project). It seems that regulation of the contracting industry is increasing.
Where should contractors/appraisers/home inspectors go to learn more about the types of bonds they need?
Keeping up with your local governing agency is always your best bet for accurate information. Publications like Contractor Mag and Construction Business Owner often feature pieces on surety bonds. And of course, the Surety Bond Insider is always reporting on changes in the industry as they arise.
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