Surety bonds act as a contract between a business, a client, and an insurance company. They guarantee the insurer will reimburse the client if the business fails to deliver contracted services.
When you sign a contract with a client, they expect you to live up to your side of it. That includes finishing a project on time and as promised.
A surety bond, also called a construction bond, guarantees that your construction company will fulfill the terms of the contract. If your company is unable to do so, then the insurance company reimburses the client for their loss.
A surety bond is an agreement between three parties:
For example, a client might require you to have a $10,000 surety bond, which you buy from an insurance company. When supply chain issues force you to drop the project, the surety bond reimburses the client for financial losses up to the bond amount.
There are several different types of construction surety bonds. They provide guarantees for various aspects of a project, from the bidding process to completion.
Construction businesses may need license or permit bonds to obtain a license or a permit, even before they start work on a project. These bonds guarantee that the company will comply with local laws and regulations.
Contractors and businesses that bid on construction projects may be required to purchase a bid bond. If they win the contract but are unable to take on the project, the client is reimbursed the difference between their bid and the next lowest bid.
A performance bond, also called a contract bond, guarantees that your construction company will fulfill the terms of its contract. If unable to do so, then the client is reimbursed for any financial losses, up to the bond amount.
This bond guarantees that all suppliers, subcontractors, and other third parties will be paid for their contribution to a project. With this type of bond, the client knows the project will be completed without any money owed for supplies or labor.
Fidelity bonds, also called employee dishonesty bonds, are one of the key coverages in a commercial crime policy. If an employee at your construction company steals from a client, this bond will reimburse the client for their loss. Clients might require you to secure this bond before allowing your employees on their property.
While surety bonds protect your clients, you still need to protect your own business against common risks. Construction business owners and contractors should consider the following policies:
Business owner's policy: A BOP bundles general liability coverage and commercial property insurance at a discount. It protects against the most common lawsuits and property damage.
Contractor’s tools and equipment insurance: This policy helps pay for repair or replacement of a contractor’s equipment and tools if they are lost, stolen, or damaged.
Professional liability insurance: This policy covers professional mistakes and oversights, such as a contractor missing a deadline for a project. It's sometimes referred to as errors and omissions insurance (E&O).
Builder’s risk insurance: Builder’s risk insurance can pay for damage done to a structure still under construction, such as fire or vandalism at a construction site.
Are you ready to safeguard your construction or contracting business with commercial insurance? Complete Insureon’s easy online application today. Once you find the right policy, you can begin coverage in less than 24 hours.