JBL Trinity Group, Ltd.

Surety History

The idea behind surety bonding is simple and direct. One person guarantees to another that a third person will perform.

This concept isn't new, in fact the Bible refers to surety bonding in Proverbs 11:15. "He that is surety for a stranger shall smart for it, and he that hateth suretyship is sure." However, the ancients used individuals instead of surety bond companies, and these individuals often proved to be unreliable. The earliest recorded attempt to form a company to engage in the surety business was in 1720. And in 1865, the United States' first corporate surety bonding company,the Fidelity Insurance Company, was formed.

Types of Surety Bonds

Contract Bonds - Bid or Proposal Bonds, Performance Bonds, Payment or Labor and Material Bonds, Maintenance Bonds, and Supply Bonds. These bonds are required by state or federal law for most public construction projects or by the project owner.

Court Bonds/Fiduciaries - This type of bond is given by a Court Fiduciary to secure the faithful performance of fiduciaries' duties and compliance with the orders of the court having jurisdiction. Typical bonds within this category include Administrators, Executors, Guardians, Trustees Under Will, Liquidators, Receivers and Masters.

Court Bonds/Judicial Proceedings - This type of bond is required when litigants seek to avail themselves of privileges or remedies which are allowed by the law only upon condition that a bond with surety be furnished for the protection of the opposing litigant or other interested party. Typical bonds within this category include Injunction, Appeal, Indemnity to Sheriff, Mechanic's Lien, Attachment, Replevin, and Admiralty.

License and Permit Bonds - This category consists of any bond required by state law, municipal ordinance, regulation, and in some instances, the federal government or its agencies, as a condition precedent to the granting of a license to engage in a particular business or the granting of a permit to exercise a particular privilege. In general, the terms "License" and "Permit" are used interchangeably. Typical bonds within this category include Contractors' License Bonds, Motor Vehicle Dealer Bonds, Securities Dealers' Blue Sky Bonds, Employment Agency Bonds, Health Spa Bonds, Grain Warehouse Bonds, Liquor Bonds, Cigarette Tax Bonds, and Sales Tax Bonds.

Public Official Bonds - This type of bond guarantees the faithful performance of duty by a public official in a position of trust. Such bonds are given to comply with federal or state statutes and, therefore, guarantee whatever liability that state imposes. Typical bonds within this category include Treasurers, Tax Collectors, Sheriffs, Constables, Judges, Court Clerks, and Notaries.

Bonds that Protect the U.S. Government - Various agencies of the federal government require or accept surety bonds for a number of different obligations, such as Medicare and Medicaid Provider Bonds, Immigrant Bonds, Excise Bonds, Custom Bonds, and Alcoholics Beverage Bonds.

Miscellaneous Bonds - This category includes other types of bonds that do not fall into the categories outlined above, such as Lost Securities Bonds, Lease Bonds, Bonds to Guarantee Payment of Utility Bills or Return of Borrowed Property, Bonds to Guarantee Employer Contributions for Union Fringe Benefits, and Workers' Compensation Bonds for Self-Insurers. Procurement of these bonds is not always guaranteed.

Things You Should Know About Surety Bonds

A surety bond is an instrument under which one party guarantees to another that a third will perform a contract. Surety bonds used in construction are called contract bonds.

There are three types of bonds used in construction. The bid bond protects the owner by guaranteeing that the contractor will enter into the contract at the determined price. The performance bond guarantees the performance of the work on schedule and according to the plans and specifications. The payment bond guarantees that certain workers, subcontractors, and suppliers will be paid.

Federal law (the Miller Act) mandates surety bonds for all public works contracts in excess of $100,000. Federal procurement officials may, at their own discretion, require bonds on projects below that amount. All states have laws requiring bonds on public works too (known as Little Miller Acts). Owners of private construction projects are recognizing the wisdom of requiring surety bonds to protect company and shareholders from the enormous costs of contractor failure.

Although surety bonding is considered a line of insurance, it has many characteristics of bank credit. The surety does not lend the contractor money, but it does allow the surety's financial resources to be used to back the commitment of the contractor, thus enabling the contractor to acquire a contract with an owner. The owner receives grantees from a financially responsible surety company licensed to transact suretyship.

Surety bonds, through the surety companies' rigorous prequalification of contractors, protect the owner and offer assurance to the lender, architect, and everyone else involved with the project that the contractor is able to translate the project's plans into a finished project. Before issuing a bond the surety needs to be fully satisfied, among other criteria, that the contractor is:
-of good character
-has experience matching the requirements of the contract;
-has or can obtain the equipment necessary to do the work;
-has the financial strength to support the desired work program;
-has an excellent credit history; and
-has established a banking relationship and a line of credit.

Contract surety bonds :
-guarantee the project will be completed;
-guarantee that certain laborers, suppliers, and subcontractors will be paid;
-relieve the owner from the risk of financial loss arising from liens filed by unpaid laborers, suppliers, and subcontractors;
-smooth the transition from construction to permanent
financing eliminating liens;
-reduce the possibility of a contractor diverting funds from the project; and
-lower the cost of construction in some cases by facilitating the use of competitive bids

With a surety bond, the owner can be satisfied that a risk transfer mechanism is in place. The risks of construction are shifted away from the owner to the surety. If the contractor defaults, the surety may pay for a replacement contractor, or provide technical and/or financial assistance.

The costs for bonds vary, but generally are one to three percent of the contract amount.

To bond a project, the owner merely includes the bonding requirement in the plans and specifications for the project. Obtaining bonds and delivering them to the owner is the responsibility of the contractor who will consult with an independent surety agent who will assist them with securing the bond.