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History of Surety Bonds

October 11, 2024

Surety bonds have been a significant part of the commercial landscape for over a century. In fact, the concept of suretyship—providing guarantees—dates back several centuries. Although surety bonds are classified as a form of insurance due to capital requirements, they function more similarly to a banking instrument. This is because a contractor must qualify for what is known as “surety credit.”

Unlike typical insurance, which is a two-party agreement that expects potential loss, surety involves a three-party agreement where, ideally, no loss should occur. The purpose of surety bonds is to prevent losses.

History of Surety Bonds in Public Projects

Surety bonds first became mandatory for Public Works projects with the enactment of the Heard Act in 1894, which applied to federal projects. This act was later replaced by the Miller Act in 1935, alongside the implementation of “Little Miller Acts” that govern state and local government projects, with bonding requirements varying by state.

Benefits of Surety Bonds

Surety bonds offer several benefits, including providing pre-qualified and capable contractors to:

  • Execute the work efficiently
  • Minimize the risk of potential liens
  • Protect taxpayer funds allocated to the project

Overview of Performance & Payment Bonds

Performance bonds ensure the satisfactory fulfillment of contract obligations, while payment bonds assure that subcontractors, laborers, and suppliers receive payment for their services.

The surety arrangement is a specific contract where the surety assures the completion of work and the principal’s (the general contractor) payments to subcontractors and suppliers, benefitting the obligee (the project owner).

Handling Defaults: The Role of Surety Bonds

In the event of a contract default, the surety company is obligated to intervene and fulfill any contractual commitments. Consequently, the surety is entitled to full restitution via the terms of an indemnity agreement with the principal, compensating the surety for any losses incurred.

For more detailed information about surety bonds and guidance on how to obtain one, contact Construction Bonding Specialists.

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At Construction Bonding Specialists, we work with new and experienced contractors to find the most satisfactory bond solutions. As a dedicated surety-bond-only agency with decades of bonding experience, we strive to discover surety solutions for all types of cases, ranging from routine to challenging. Contact us online or call us at 248-349-6227 to learn more.

Written by the digital marketing team at Creative Programs & Systems: www.cpsmi.com