A written guaranty from a third party guarantor usually a bank or an insurance company is submitted to a principal client or customer by a contractor on winning the bid. A performance bond ensures payment of a sum not exceeding a stated maximum of money in case the contractor fails in the full performance of the contract. Performance bonds usually cover 10 — This type of performance bond protects the customer after a job or project is complete.
The surety, otherwise known as the insurance company providing the bond, guarantees to the obligee that the principal will fulfill an obligation or perform as required by the underlying contract. A surety company, like UFG Surety , focuses on helping contractors and other business owners get bonded. As a standard business practice, sureties only bond contractors and companies in which they feel confident. A variety of documents must be submitted to the surety in order for them to perform their analysis.
Generally, most submissions include current and historical financial statements, loan agreements, job schedules, certificates of insurance and a completed company questionnaire. In most cases, the obligee is an organization that requires a bond, such as the government. Governments require a surety bond in order to reduce overall risk in the project. As the beneficiary of the contract, the obligee pays the principal upon fulfillment of the terms.
Are you interested in learning more about UFG Surety? Toggle navigation. When deciding between a surety bond and insurance for your business, the following differences need the be taken into account. An insurance policy involves two parties in the agreement, namely the insured the business obtaining the policy and the insurer the policy provider.
On the other hand a surety bond involves three parties into agreement the oblige the protected person , the principal the person who fulfills the terms and the surety the person who issues the bond. Insurance premiums are often paid monthly and mitigate the risk of any losses that might occur. A surety premium is paid once and only paid again if the bond needs to be renewed. The purpose of the premium is to guarantee that the principal fulfills their contractual obligation.
An insurance company absorbs the financial loss of a claim against an insurance policy and will only charge a small excess fee to the business. In stark contrast, when a claim is made against a surety bond, the surety will pay the cost of the claim, but will hold the principal accountable for the full reimbursement of the claim amount.
This means that surety works more like a type of credit provider than an insurance policy. When considering insurance premium costs, the value of the asset and the risks that the asset is exposed to, are considered to calculate a premium cost.
When calculating the premium of a surety bond, the size and type of bond, and the financial strength of the principal is considered. Bonds that carry a high risk factor will be more expensive.
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