Bonds
The
first thing to remember about Surety Bonds is THEY ARE NOT INSURANCE, at least not
like most people think of Insurance. A surety bond is a promise to pay one party
(the obligee) a certain amount if a second party (the principal) fails to meet some
obligation, such as fulfilling the terms of a contract. The surety bond protects
the obligee against losses resulting from the principal's failure to meet the obligation.
It is very similar to a promissory note in that if the bonding company pays the
obligee they will then come to the principal seeking reimbursement and you credit
rating is a major factor in the pricing of a bond.
Two of the more common types of bonds contractors are sometimes required to provide
are Performance Bonds and Bid Bonds. The Performance Bond secures the contractor's
promise to perform the contract in accordance with its terms and conditions, at
the agreed upon price, and within the time allowed. The Bid Bond is intended to
keep frivolous bidders out of the bidding process by assuring that the successful
bidder will enter into the contract and provide the required performance and payment
bonds.