Carrying a surety bond is an important component of contractual agreements. If you experience a bond claim, you have a financial obligation to the affected party. This means you may owe money to one of the other actors in the bond agreement. So, you must make sure you have the assets to repay the bonds.
Understanding Bond Structure
Think of a surety bond as a type of guarantee. It is like a promise that the contractor will repay its clients' lost costs if the work cannot be completed. A surety bond involves three parties:
- Principals: The contractor that carries the bond.
- Obligees: The contract owner or party requesting or benefiting from the bond.
- Surety Company: The financial company that issues the bond.
The principal will take out a bond from the surety company. The type of bond they get will likely vary based on such factors as the law and obligee requirements. They then pay a premium to carry the bond, much like an average insurance policy.
Let's say you, as a principal, cannot complete your work. This could lead to lost costs for the obligee. The bond can provide assistance in this situation. The obligee can file a claim with the surety company for a sum up to the value of the bond. The surety company will help cover the cost they incurred because of unfinished work.
A Principal's Role in Bond Repayment
Unlike insurance, bonds simply guarantee repayment by the principal to the obligee. When an obligee makes a bond claim and the surety company pays, the principal does not get off for free. After all, the surety company does not intend to lose money on the deal. Principals still to repay the surety company cost of the claim on the bond. In limited cases, they may make the remittance directly to the oblige instead.
Compensating the surety company or obligee is part of the deal, and principals usually have to follow a specific repayment process. It is imperative that principals have the financial flexibility to repay the bond. If the principal reneges on their bond payments, this could lead to legal issues.
If you're a principal and do not have the assets to repay a bond, talk to your obligee and surety company. They may be willing to work with you to structure the bond repayment strategy.
Have questions about surety bonds? Contact Lancette Agency for more information.