If you are an independent builder or contractor, you are likely to be well informed about surety bonds especially the license and permit bonds. License and permit bonds are typically required by a township or state to ensure that the services expected of you are completed according to the set regulations.
What Every Contractor Must Know about the License and Permit Bonds
It is a requirement by the federal, state or municipal government that the construction and contracting businesses have a license and permit bond. The bonds act as a guarantee from a surety which is usually an insurance company, to a government that your company will comply with an underlying state and local laws relating to your industry such as the building codes and safety regulations.
If, for instance, your company wins a bid to build a framework for a new school, usually, you will have to buy a surety bond that will pay the school if you don’t complete your contract to the end or if your performance was not up to code. The the school could then use that money to pay another builder or contractor to get the job done. The insurance company paying the money will hold you responsible for reimbursement.
Key Details of Permit and License Bonds
The contracting and construction license bonds and permit bonds will always involve three parties: The Obligor or the company providing the bond; the oblige or the client requiring the bond; and the principal who is the contractor or builder in need of the bond.
When you sign into a permit bond or license bond, you are promising to perform your task and stick to the state or municipal regulations. The oblige is a party in this agreement as they pay you to perform the work. When you fail to perform the work as required by the contract; the surety will step in to issue the bond and pay the oblige.
A license bond or Permit bond is different from most business insurance contracts as it involves three parties instead of the common insurer and insured parties. When it comes to the builders and contractors, the primary difference between a bond and a typical insurance contract is that the surety’s duty is to the oblige, rather than the contractor, even when they pay for the bond.
The the fact that surety claims are not as a result of accidents but a failure to complete a project according to the contract terms, the surety or insurer has a responsibility towards the client to ensure that they prequalify the contractor for the task. To guarantee the performance and integrity of the contractor to the client the surety must carefully assess the bond history and creditworthiness of the builder or contractor.