Bonds with your business in mind.
A bond is a great way to guarantee that a large investment in a project is not lost—whether or not the work gets done. This type of insurance is especially common in the construction industry and is often utilized for government contracts.
Performance and payment bonds.
A performance bond and payment bonds are construction bonds that protect two different groups. Performance bonds protect the owner from an improperly performing contractor. Payment bonds protect subcontractors, suppliers, and laborers to receive unclaimed wages or expenses associated with the fault of the contractor. They usually go hand-in-hand, therefore, you should expect to receive both within a single policy.
When would a bond be necessary?
A bond is an unusual form of insurance in that one person or organization pays for it, while another receives the benefit. It’s easier to understand with an example. Imagine a contractor is building a new office building for a government agency. The agency naturally wants a guarantee that the taxpayer won’t be left out of pocket if the contractor fails to deliver the offices as promised.
How do bonds work?
The contractor pays a premium to an insurer to purchase the bond. The insurer then pays the necessary compensation to the agency if the contractor fails to deliver. The big difference between this and ordinary insurance is that the insurer can and will go after the contractor to get this money back. The point of the bond is that the agency gets the assurance that it won’t have to chase after the money itself.
The difference between the principal and the obligee.
While government agencies commonly insist on a bonds, it can work with any two organizations. The one that purchases the bond is “the principal,” while the one that gets any payout is “the obligee.”
If there’s anything else you need to know about bonds, contact us today.
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