The role of an insurance agency is to provide their clients with protection, whether that is financial compensation for loss of property, expenses due to injury or death, or for unforeseen natural events and the damage that can result.
Many insurance providers also issue contract bonds, part of an industry segment known as surety bonds. Primarily, these are used in the construction industry and help protect both the contractor and the property owner.
What is a Contract Bond or Construction Bond?
For any business that uses contracts as part of their service delivery, a contract bond is a form of guarantee that the contractor will adhere to and abide by the specific details contained in the contract. In the construction industry, with many contractors and subcontractors working on complex jobs, construction bonds give protection to the project’s owner, specifying that the contractor(s) will complete the work as specified and pay suppliers, subcontractors, and laborers appropriately.
What are some Contract Bond Types?
There are a number of contract bonds prepared by insurance companies. These include:
Performance bonds – in these contract bonds, a guarantee of adequate and faithful performance on the part of the contractor is protected. This follows the terms of a given contract, and for construction projects, it includes the construction itself as well as the supplies and personnel needed to complete the project.
Payment bonds – these bonds guarantee timely and complete payment for labor and materials that are used as part of the contractor’s obligation to complete the project.
Maintenance bonds – these provide the property owner or project owner a guarantee of protection against financial loss due to defective materials or workmanship in the project.
Bid bonds – in these contract bonds, it guarantees that a given contractor will enter into a contract in good faith if awarded as well as agreeing to provide any other contract bonds required or specified by the contract itself.
The Contract Bonding Process
Insurance companies wish to protect the financial assets of their clients, and in contract bonds, a process of ensuring that contractors entering into projects have adequate resources and capabilities to complete a given project. This is sometimes referred to as the “vetting” process. Before any contract bond or surety bond is issued, the insurance company will carefully review the contractor’s financial assets, income tax returns, and personal or corporate year-end financial statements. In addition, the insurance company may contact the contractor’s banking firm, its material suppliers, and past clients to gain a solid understanding of the company’s practices and track record before issuing a surety bond.
By reviewing this information before a contract bond is issued, the insurance company is taking steps to ensure that any guarantees specified in the bond can be met if an unforeseen event occurs. For more information about contract and construction bonds and what is required for their issuance, contact your qualified local insurance agent as soon as possible.