In order to qualify for a bond, you must first prove that you are capable of performing the work and also completing the job. Once this is accomplished, you must now prove that you qualify for the bond. Your bond producer wants to know if you have the assets to pay for a claim should things go awry. A bonding company will write a bond if these two criteria are met. But how do you secure a bond?
Sureties may differ many ways when evaluating your assets and deciding them acceptable. Some may look for common stock that is traded in on the National Securities Exchange while others prefer certificates of deposits. All agree that the more you can liquidate your assets into cash, the better. Tangible assets that are easily converted are most acceptable. A good guideline is to follow which is acceptable to the government standards as well as which are unacceptable. Your surety can help you with this list. Common sense will tell you that your car, home, capitol equipment, or any asset that could fluctuate or depreciate over time is an unacceptable asset. Some bonding companies will even find real estate unacceptable as an asset so consult with them before making your list of assets. All your assets are favorable and establish your net worth. The assets that you use as collateral are the gems that underwriters seek. By accepting these assets, the surety “identifies” your assets as collateral.
A surety will write a bond if they are certain that they are not held liable for any claim that may occur; and that the liability is secured. In most cases, the liability is on the principal but sometimes the liability is shared with other indemnitors such as subcontractors. Once all parties agree that compensation shall be made for any damages or losses in form of a claim, which party is liable for the claim and adequate assets are identified to secure the claim; then a contract is written as an indemnity agreement. A surety may write one indemnity agreement for each bond or one general agreement for many bonds depending on the surety or the circumstances. Once signed by all parties, law binds it and all parties are obliged to adhere to the agreement. The principal promises to reimburse in full, any costs associated with the claim as well. This includes legal fees and other expenses incurred. In the event a claim is filed, the surety will pay for the claim and associated costs and the principal must reimburse the surety.
As mentioned above, a general indemnity agreement may be for several bonds. This agreement covers a wide spectrum of costs that are considered relevant or not relevant to the claim such as sanctions or fines bestowed upon the surety. The surety has a right to call in the debt from the principal before the surety pays the claim. This common law right is called exoneration. When a surety becomes exonerated, the principal pays the cost of the claim and as a result, liability is removed from the surety. Some general indemnity agreements require principals to pay for claims as soon as they are made against the bond.
Upon notification of a forthcoming claim against a bond, the surety may produce a “reserve”? immediately. The funds are drawn from an account to satisfy the expected amount of the claim. The sum of funds deposited from the principal and surety together act as collateral for the surety to use if the issue arrives.
Surety’s Authority: If the job is in jeopardy of not completing the work, the surety may step in to avoid default on the contract (which is why construction bonds are required in the first place). This gives the surety the right to use whatever means necessary to complete the work and expire the bond. Use of equipment or plant facility, decision-making and perhaps loans are included to insure that the performance is guaranteed. The surety is then reimbursed from the obligee, principal or both any expenses incurred. In some cases, the bonding company may out source the work altogether as another means of avoiding default. The assignment of contracts may be negotiated prior to bond issuance to the surety by the obligee and principal. This action gives the right to the surety for plant and equipment use, sub contractors and all other contractual rights to the surety. The surety is entitled to proceeds from the job along with any claims associated with the job.