What is a Surety Bond?
A Surety bond is a written agreement in which, in exchange for the surety bond premium, the surety promises that it will fulfill the contractual obligations owed to the obligee in the event that the principal fails to do so. In the construction industry, the principal is usually a contractor that is bidding or will be performing work on a project. The obligee is usually the owner or other party who requires the contractor retain the surety bond. Surety bonds can also be required in other instances, such as ensuring performance of a written contract, ensuring payment of certain amounts, repealing or appealing of certain permits or licenses, or ensuring other obligations are met.
A Surety bond has three parties: The Surety is the insurance company that issues the bond and accepts the risk of the performance by the principal of obligations to the obligee. The Surety also receives the premium for issuing the bond from the principal. The premium is usually a small percentage of the exposure to loss. If the principal fails to meet its obligations, the Surety will have to incur costs to meet the principal’s obligations, and then may pursue indemnity or other rights against the principal.
The Obligee is the other party to the bond. The purpose of the Surety bond is to protect the obligee from the direct costs that would be incurred if the principal fails to comply with his obligations.
The Principal is the party seeking the bond. The principal pays the premium to the Surety for this specific bond in exchange for the Surety’s promise to perform its obligations under the Surety bond. The principal may also be responsible for additional indemnity agreements, such as a guarantee or personal indemnity. Personal indemnity generally arises when an individual business owner, officer, director, etc. is seeking the bond and the individuals agrees to personally indemnify the Surety if the business is unable to fulfill its obligations, fails to pay the premium , or otherwise causes the Surety to incur a loss.
A Surety bond merely acts as a third-party obligation between the Surety and a claimant for a principal’s default. Surety bonds do not protect a principal from a default or from liability. Surety bonds also do not act as an indemnification agreement between the Surety and the principal, unless the principal has also executed an indemnity agreement. Instead, the Surety bond will provide that the Surety, after being presented with a claim by an obligee, may fulfill its contractual obligations by either paying the claim, or performing the contractual obligations and will usually grant the Surety the right to all contract rights of the principal. The Surety bond allows certain protections to a Surety, while not eliminating all responsibility by a principal.
In practice within the construction industry, the Surety bond will "follow" the principal or the bond will "flow down" to the Surety. For instance, if the principal has delayed the performance of the underlying contract, then the Surety can either pay for the damages or take over performance and pay for the delay, but the Surety will then be subrogated to the rights of the obligee. If the Surety performs the underlying contract, then the Surety can go back against the principal for the costs and then for their outlays in the performance of the contract.
Because Surety bonds follow the principal/bond, the bond is generally used as another form of assurance or credit enhancement to pay for any default of the principal. Surety bonds are considered a highly rated credit enhancement, similar to insurance policies, LOCs, and/or equity. A Surety has a duty and legal obligation to its shareholders and employees to act accordingly to the terms of the bond obligations. This is separate from the effects on the principal or third parties. The Surety does not have a duty to the bond principal, unless there is a specific contractual agreement.
Different Types of Surety Bonds in Texas
There are many types of surety bonds that are required by Texas governing authorities. The most common being:
Construction Bonds: These are typically required for state, local and municipal project owners and contractors seeking to perform construction or renovation work, such as roadways, bridges, tunnels, courthouse construction, school renovations and even airport improvements.
Commercial Bonds: These generally cover businesses that offer a product or service to the public. These types of bonds can protect clients from unreputable practices that may result in the company’s demise.
License & Permit Bonds: These are usually required to ensure that the business abides by the laws and regulations that apply to their particular industry. Some examples include automotive dealers, cigarette distributors, telemarketers, collection agents, employers, third party custodians and motor vehicle carriers.
Regardless of the type of bond, Texas surety bonds are premised on the surety contractor’s promise to the principal and the obligee that, if the principal does not fulfill its contractual obligations, the surety will pay or perform whatever the principal is obligated to do up to the limit of the bond.
Who is Required to Get a Surety Bond in Texas?
Understanding Texas Surety Bond Requirements: A Comprehensive Guide
Who Needs a Surety Bond in Texas?
While the answer to whether a particular person or business needs to obtain a bond will often depend on the specifics of their situation, many common situations involve the requirement of a surety bond or several bonds. Three categories of people and businesses that often require bonds in connection with their professional licenses or work include: Individuals or businesses acting as insurance producers. Similar to the licensing requirements of securities brokers and financial advisers, in Texas, an individual or business entity that sells various types of insurance to clients is required to obtain a surety bond. Internal Revenue Service Circular 230 practitioners. Practitioners of various types of tax law matters and admissions to practice before the IRS are subject to the requirements of the Internal Revenue Service Circular 230. This includes not only the requirement for a surety bond, but also a user fee. The failure to obtain the required bond or to pay the user fee can subject the practitioner to suspension or disbarment from practicing before the IRS, the imposition of other disciplinary action, exclusion from any matter before the IRS and significant fines. In order to represent a client facing an audit or similar review, it is critically important for the practitioner to have a surety bond as the IRS punishes those that fail to follow its rules. Mortgage broker, lender and originator. Texas law requires that certain mortgages brokers and lenders be licensed. Depending on whether the company is a mortgage broker, lender, or an originator, a different licensing agency is involved in the process, but all of them generally require the application submit a surety bond.
How to Secure a Surety Bond in Texas
The process of obtaining a surety bond in Texas can be a bit daunting, but with the right information and preparation, it can go quite smoothly. The first step is to find a surety bond provider that specializes in the type of bond you need. This could be a surety bond company, a surety bond broker, or an agent that has specific knowledge in the type of bond you are looking for. Be sure to ask your provider about their experience, number of bonds placed each year, and their knowledge of bond requirements within your industry. After selecting a surety bond provider, you will then need to complete a surety bond application. This may be done in person or online and includes a personal financial statement, a statement of the nature of your business, and general background information. Don’t worry if you don’t have the necessary documents at the time; the surety bond provider will usually allow you to have some time to submit the requested documents. Since all surety bond premiums are based on your credit worthiness, the surety bond provider will check your credit rating. If you have good credit, you may be approved for the amount of the surety bond you need. Surety bond premiums can be issued in flat or scheduled premiums. Flat premiums are one annual payment covering the full term of the bond, while scheduled premiums are paid on a monthly, quarterly or annual basis. If you do not qualify for the bond amount you need due to issues with your credit rating, don’t be alarmed. Surety bond companies will often issue a bond at a higher premium or through special underwriting if you are willing to pay it. They will also be able to provide you with a referral to an agent that specializes in bad credit surety bonds. Once the surety bond premium is agreed upon, a surety bond agreement will be sent to you via email for you to review and sign. Once signed, the bond is usually issued the same business day. While many contracts require bonds to be obtained and submitted before beginning a project, it is important to read the fine print. A contract will usually say there is no penalty for late or non-submission of the bond. In this case, the bond should be submitted as soon as it is received. Failure to submit the bond immediately can result in the termination of your contract as responsibility falls on you to perform as per the terms and conditions of the contract.
Prices for Surety Bonds in Texas
The cost of your Texas surety bond will vary based upon the amount, the type of bond, and your credit score as an applicant. Most types of bonds in Texas have relatively low minimum requirements, but there are still some that can be in the millions of dollars. Unfortunately, increasing your bond amount beyond the minimum often will not decrease your premium (the percentage of the bond amount charged by the surety).
Texas Surety Bond Amounts
Below is a breakdown of the bond amounts required for the most common types of Texas surety bonds: As you can see from the above, Texas surety bond amounts can range from $1,000 to well over a million dollars. As a general rule, your surety premium will not be more than 10% of the bond amount. However , the rule of thumb for the majority of Texas surety bonds is 1% to 5%.
Texas Surety Bond Types
Texas surety bonds can be divided into four broad categories, with the majority of surety bonds falling into the regulatory and miscellaneous categories. These are: The type of surety bond you require also will have a major impact on your surety premium.
Estimating Your Texas Bond Cost
The easiest way to estimate the cost of your Texas surety bond is to use our cost calculator. This calculator will provide you with a guaranteed lowest bond premium, which is based upon your credit score and the information you provide regarding the bond you need. You also can call us at 1-800-608-9950 to get an accurate rate quote and quick service. If you are planning on applying for a license or exploring a bond premium reduction, we recommend obtaining a free copy of your credit score first.
Claim Process After Surety Bond is Posted in Texas
When a claim is made against a Texas surety bond, the surety company typically has 30 days to investigate and respond to the claim. During this period, it will work with all relevant parties to determine the validity of the claim and the amount owed. The surety company’s investigation will usually include communication with the party who made the claim, the party that the claim was made against, and any third-parties that are necessary to make a final determination as to the validity of the claim.
In these claims, the surety company is representing both itself and the party who purchased the bond. Therefore, it is critically important that the surety’s rights and interests are properly protected throughout the process. Landes Surety & Bonding Agency highly recommends that all parties work directly with its licensed agent to ensure compliance with the conditions and requirements found in the bond.
In rare cases, the surety company may even bring suit against the claimant in a Declaratory Judgment action. In these actions, the court determines the legality and validity of the bond, and further adjudicates any other issues relevant to the parties.
Bond claim processes are always initiated by the claimant. However, once these claims have been properly submitted, the surety company is required to promptly report to the principal, as well as any indemnitors listed on the bond. By accurately reporting all information and communicating with all potentially affected parties, the surety company is able to keep everyone informed and protect its interests.
Claim filing procedures can vary based on the type of bond purchased. In Texas, corporations should submit claims to the Secretary of State, while other claimants should file with the Office of Risk Management, although it is not uncommon for claims to be filed with both entities.
It is important to remember that someone who may be primarily responsible for the performance or non-performance of a contract may not be primarily responsible for its costs. Consequently, an indemnitor of a surety bond claim is not necessarily liable for the full face value of the bond.
Legal Consequences of Failing to Comply with the Surety Bond Requirements
Failure to comply with surety bond requirements in Texas can have serious, and costly, ramifications. Not only can the contractor be held liable for any damages or losses incurred as a result of their failure to obtain the bond, they can also be held responsible for the costs associated with paying for a replacement bond.
If a bond is required by a governmental entity, the contractor or debtor may be barred from entering into any future contracts with that governmental entity until the conditions of the bond are met. Unpassed bonds can even put professional licenses at risk . This is especially true of temporary permits and licenses, which are often contingent on the contractor having an active surety bond.
A common penalty for failing to meet surety bond requirements is a fine. The size of these fines can vary by bond type and by state, but a contractor can easily find themselves on the hook for thousands of dollars in fines if they neglect to get a required bond. If the contractor continues to fail to update or maintain their bond when it comes due, they may face further penalties, in the form of interest on any fees owed, and the agency requiring the bond may even revoke the contractor’s license or certification.