A contract surety bond acts as the extension of a form of a credit on behalf of the bonded contractor, also referred to as the bond principal. Contract surety bonds, which are required for contractors working on most public works projects and many private works jobs, include performance, payment and bid bonds.
Surety bonds differ from insurance in two important ways. First, they generally do not bond unknown risks, but instead secure a contractor's contractual and statutory obligations to others, such as project owners, other contractors, suppliers and laborers. Second, surety bonds differ from insurance in that the surety is to be indemnified and reimbursed for any loss, fees or other expenses incurred on behalf of a contractor.
An agent or broker obtains bonds on behalf of their contractor clients. This process includes procuring from the contractor information and documentation needed by the surety to evaluate a request for bonding. The type and amount of the bonds requested may also narrow the field of potential sureties that will issue the bond.
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