What Is an Insurance Bond in Construction?

March 15, 2024

If you're a construction contractor, you may have heard that you need to obtain a surety bond. But what exactly is an insurance bond in construction and how does it work? This article will help you understand the basics of construction surety bonds, including who gets a claim and what they cover.

A surety bond is a three-party agreement between a surety provider, a contractor and an obligee. The contractor, who is referred to as the principal in a bond, is responsible for obtaining and renewing the bond. They also pay the premium, which is a small percentage of the bond amount. The bond protects the project owner from financial loss due to the bonded contractor’s failure to fulfill their contractual obligations. If a problem occurs, the project owner can file a claim with the surety company for compensation. The surety company then covers the cost of any repairs, up to the limit set by the bond.

The types of construction surety bonds available vary. For example, performance and payment bonds guarantee that contractors will meet the terms of a contract to complete a project on time and within budget. Construction and supply chain contracts can include many parties, from suppliers to subcontractors to laborers. If someone isn’t paid for materials or services that they provide to a contractor, they can file a claim with the surety agency seeking compensation.

Another common type of construction surety bond is a warranty or maintenance bond. These are similar to performance and supply bonds in that they guarantee that the contractor will honor their contractual commitments to a project, but they also ensure that repairs will be made for a specified period of time after completion.

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