Construction Risks and Performance Bonds

Oftentimes clients have called in requesting a performance bond on a new job they have successfully bid on. While access to these types of bonds is fairly easy to obtain, more often than not most insureds are unaware of the actual implications of the bond and what is required to successfully obtain one. The typical bond required by most construction type risks is the performance bond. A performance bond is a type of surety bond that is typically required to obtain the contract and provides financial guarantees to the owner that the contractor will fulfill the contract according to the parameters laid out in advance. In order to obtain the bond the surety company will conduct an investigation into the contractor's fiscal health, usually through the use of tax returns, corporate financial statements, etc. Once the surety is satisfied then a bond is issued in the amount specified under the contract. An important note for the contractor to take into account is that if they fail to live up to the terms of the contract and the terms of the bond are called on, after the surety investigates and any payment is made then the surety goes back to the contractor for reimbursement. Bonding is not a standard insurance contract in which funds are paid out in the event of a loss. When a bond is paid the contractor must reimburse the surety whereas in the the event of a payment for loss under standard insurance, the insured has only paid the premium for insurance coverage purchased and is not required to reimburse the insurance company in the event of a loss payment. It is best to think of applying for bond in the same terms as applying for a business loan. A thorough financial investigation is conducted in much the same way.

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