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What are contractor surety bonds?
What are the six types of bonds contractors might encounter?
Why are license bonds important for contractors?
What is the purpose of payment and performance bonds?
How can BOSS Bonds help contractors secure these bonds?
As a Property and Casualty (P&C) insurance agent, your insurance policies play a vital role in protecting your contractor clients. You can offer these clients even more protection by adding surety bonds to your product mix. Contractors purchase several types of surety bonds throughout their careers, making them an ideal cross-selling opportunity.
In this article, we’ll explore six common types of contractor surety bonds and how they can make you your clients’ go-to risk management resource. We’ll also explain how to seamlessly integrate surety bonds into your portfolio.
What Are Contractor Surety Bonds?
Before we dive into the different types of surety bonds, it’s important to understand what they are and how they work. A surety bond is a legally binding agreement between three parties:
- Principal – The contractor who purchases the bond.
- Obligee – The party requiring the bond, such as a project owner or government agency.
- Surety – The insurance company or bonding agency that guarantees the principal will meet their obligations.
Surety bonds incentivize contractors to satisfy their contractual and regulatory duties and remedy any issues that arise. If they don’t, their surety company will cover the obligee’s financial losses up to the bond amount and seek repayment from the contractor.
Contractors use two main types of bonds: commercial bonds, which focus on legal and regulatory compliance, and contract bonds, which focus on contractual adherence. Below, we’ll explore these bonds and their six subtypes in greater detail.
#1 License Bonds
Most states require contractors to obtain contractor license bonds to operate legally. These commercial bonds ensure that contractors comply with all relevant state and local regulations. In turn, they protect the public by guaranteeing that contractors uphold stringent safety and quality standards.
If a contractor falls short of their legal or regulatory requirements, this type of surety bond requires them to remedy the situation or compensate affected parties for any losses. Unresolved bond claims may result in the suspension or termination of their contractor license.
As a P&C agent, this is an easy cross-sell opportunity for your clients who are just starting their contracting businesses.
#2 Bid Bonds
Once a contractor is licensed, they can start bidding on projects. That’s when bid bonds come into play. Bid bonds are often required on public projects and many private-sector jobs. They guarantee that the contractor has the financial capacity to complete the project as promised.
Bid bonds discourage contractors from submitting frivolous or lowball bids just to win a contract. If a contractor wins a project but refuses to move forward as agreed, their bid bond ensures that the project owner is compensated for any financial losses resulting from the re-bid process.
As a P&C agent, providing bid bonds can help you empower your contractor clients to bid on projects with confidence and secure more business.
#3 Payment and Performance (P&P) Bonds
After winning a contract, a contractor may need to purchase a payment and performance (P&P) bond. While these bonds are often grouped together, they serve two distinct purposes:
- A payment bond ensures that a contractor’s subcontractors, suppliers, and laborers are paid for their work and materials on time. If the contractor fails to pay these parties, they can file claims against the contractor’s surety bond and seek compensation from the surety company.
- A performance bond guarantees that the contractor will complete the project according to its contract’s terms and conditions, stay on budget, and meet all deadlines. If the contractor fails to do so, the surety may need to find a replacement contractor to complete the job or compensate the project owner for the loss.
Many large construction projects, especially government jobs, require P&P bonds during the contracting process.
#4 Maintenance/Warranty Bonds
Maintenance bonds, also known as warranty bonds, guarantee that a contractor will address any defects or issues that arise within a specified period after a project is finished. If they don’t fix these issues, their obligee can seek compensation from the surety to cover repairs related to faulty workmanship or materials.
Contractors who purchase maintenance bonds show project owners that they proudly stand behind their work and take responsibility for any post-completion problems. Thus, these bonds can provide project owners with peace of mind.
As an insurance agent, you can offer maintenance bonds as a tool to help contractors build trust and credibility with their clients, leading to more repeat business.
Secure Every Bond Your Contractor May Need
Bid, performance, payment, maintenance, supply, and subdivision bonds are critical for contractor compliance and project success. Browse all available contractor bonds on BOSS Bonds and submit your application in minutes.
#5 Development/Subdivision Bonds
Contractors who work on land development projects often need to buy subdivision bonds to secure contracts. Similar to performance bonds, these bonds guarantee that the contractor will complete the project according to its terms and conditions.
Local governments or municipalities require these bonds to ensure that public infrastructure work is completed properly and to protect taxpayers’ financial contributions.
If your contractor clients work in land development, offering subdivision bonds can help them secure contracts and stay compliant with local government regulations.
#6 Supply Bonds
To participate in large-scale construction jobs, contractors often need to secure supply bonds. These bonds guarantee that the contractor will bring the required materials or equipment to the project on time.
If the contractor fails to deliver on schedule or uses substandard materials, the project owner can file a claim against the bond to cover the cost of sourcing replacements. As a result, supply bonds help prevent project delays related to unreliable suppliers.
Offering supply bonds to your contractor clients can help them engage in complex projects that involve material deliveries.
Why Cross-Sell Surety Bonds as a P&C Agent?
Now that you understand the six main types of surety bonds for contractors, let’s review three compelling reasons to add them to your product mix.
- Increased revenue – Selling surety bonds along with P&C insurance policies can boost your overall sales and revenue.
- Stronger customer satisfaction – By meeting more of your clients’ needs, you can become their one-stop shop for all things risk management and win their long-term loyalty.
- Enhanced expertise – Contractors value working with insurance agents who understand the nuances of their business needs. By offering surety bonds, you can become a trusted partner in their eyes.
As you can see, cross-selling surety bonds can diversify your offerings, help you grow your business, and bolster your client satisfaction.
BOSS Bonds: Start Cross-Selling Surety Bonds With Ease
In summary, selling surety bonds alongside your standard insurance policies is a smart way to boost sales and strengthen client relationships. If you’re ready to reap these benefits, BOSS Bonds can help.
As a trusted, surety-only partner, we offer competitive rates, responsive service, and a streamlined experience. Unlike other surety agencies, we focus solely on surety bonds, so there’s no competition for your insurance clients.
Better yet, we make the bond management process a breeze. You can maintain full visibility over your bonds from our exclusive SuretyBonds.Market (SBM) portal. It allows you to track applications, approvals, and commissions seamlessly—all while enjoying direct communication with our team.
Ready to expand your product offerings and earn competitive commissions? Partner with BOSS Bonds today!
Sources:
Construction Business Owner. Your Guide to State-by-State Bond Thresholds.
https://www.constructionbusinessowner.com/insurance/your-guide-state-state-bond-thresholds
