As previously stated, one of the most important aspects of surety is the indemnification provided by the Principal for the benefit of the Surety. Personal assurance is another term for this requirement. Due to the common practise of jointly owning personal properties, it is expected of privately owned company principals and their spouses. In the event that a Surety is unable to obtain voluntary repayment of loss incurred by the Principal’s failure to fulfil their contractual obligations, the Surety may require the Principal’s personal assets to be pledged as collateral. This personal assurance and collateralization, while potentially stressful, provides the Principal with a compelling opportunity to fulfil their obligations under the bond.Do you want to learn more? Visit MEY’S INSURANCE SERVICES-Surety Bonds
Surety bonds are available in a variety of forms. We’ll focus on the three types of bonds most generally associated with the construction industry for the purposes of this discussion: Bid Bonds, Performance Bonds, and Payment Bonds.
The “penal number” is the absolute limit of the Surety’s economic exposure to the bond, which is usually equal to the contract amount in the case of a Performance Bond. If the face value of the construction contract rises, the penalty amount will rise as well. The Bid Bond penalty is a percentage of the contract bid number. The Payment Bond’s penal number reflects the costs of services as well as the sums required to be charged to subcontractors.
Bid Bonds – Assure the project owner that the contractor submitted the bid in good faith, intending to complete the contract at the bid price, and has the financial resources to obtain the requisite Performance Bonds. It provides project owner (Oblige) with economic downside security in the event that a contractor is awarded a project but declines to proceed, forcing the project owner to accept the next highest bid. To compensate the project owner for the cost difference, the defaulting contractor must forfeit up to their full bid bond amount (a percentage of the bid amount).