What is a Surety Bond?
A surety bond is an agreement among three parties that is used for a variety of purposes and often required by state law. It is an agreement between a surety (a third party who provides a guarantee, such as an insurance company), a principal (the party who purchases the bond), and an obligee (the party who requires the bond) that guarantees that the principal will fulfill some obligation. If the principal fails in some regard, the surety is obliged to fulfil the obligation and will be compensated by the principal.
The obligation can be anything from a contractual promise to a legal requirement. A simple example is the bond given by a person who has purchased and registered a car. The car is the vehicle; the state is the principal; the surety is the insurance company. If you don’t pay the taxes on the car, the state can come after you and seek payment by calling on the insurance company to make the state whole . In North Carolina (and elsewhere), this concept is particularly important within the construction industry, both public and private. When a construction project is being let for bids, it is common for both the owner of the project and the prime contractor to require that certain bonds be issued to assure that the general obligations are met. If the contractor fails to meet its obligations either to the owner or pay its subcontractors or suppliers, the party making the bond claim can call upon the surety to fulfil the obligation. Although the surety will usually pursue subrogation proceedings against the contractor/principal, the bond does not eliminate the claimant’s need to enforce its rights under a contract. In a bond claim situation, the surety is not bound to pursue the same course of action that a contractor would pursue, such as filing a mechanics lien or seeking an equitable lien in a foreclosure action. In most cases, the surety will simply pay the claim if the contractor/principal fails to do so.
North Carolina Surety Bonds by Category
North Carolina requires many different types of surety bonds, depending on the purpose for which they’re going to be used. Surety bonds provide funds, up to the amount of the bond, as recompense for any losses that are suffered as a result of the surety’s (the surety bond company’s) failure to pay or do what the bonded party is legally obligated to do. In accordance with that purpose, license and permit bonds, contract bonds, and court bonds are the primary types of bonds in North Carolina.
License and Permit Bonds: A license bond is a bid bond, performance bond, payment bond, or maintenance bond. Bid bonds guarantee a construction contractor’s ability to enter into a contract, satisfying the contractor’s obligation to award a contract to the owner (the person or entity to whom the contract is granted) and intend to have it performed if the contract is awarded to them. Performance bonds protect owners from the risk that a contractor will fail to successfully complete the job. Payment bonds, meanwhile, ensure that subcontractors and suppliers will be paid for their work and materials, even if the contractor defaults. Finally, maintenance bonds cover any defect in workmanship or materials for a certain period of time after the project is completed.
Contract Bonds: A contractor bond is a type of surety bond. For instance, a North Carolina residential contractor bond may be required of a residential contractor before he or she can obtain a business license in the state. Contractor bonds protect consumers against the damage caused by unlicensed and incompetent construction contractors.
Court Bonds: A court bond may be required in civil or criminal court. Bond requirements vary from case to case, and include appeal, bail, agency, beneficiary, judgment, probate, and condemnation bonds, among others. For example, a contesting heir to a will or trust may be required to post an appeal bond when contesting a probate or trust action. A State of North Carolina Motor Vehicle Department title bond is another example of a court bond requirement.
In the hopes of sparing the customer the hassle of contacting an insurance carrier, some companies may ask you to contact them directly; that way, they can avoid a margin of error that comes with a third-party. Still, two corporate sureties are willing to consider a request for reconsideration of the surety bond decision.
Who Requires a Surety Bond in North Carolina?
Whether you are a new professional setting up your North Carolina surety bond or an old pro, a construction contractor, auto dealer or real estate broker, it is always good to double check your knowledge of the North Carolina surety bond requirements. North Carolina surety bonds are most commonly required of contractors, auto dealers, and real estate brokers. However they are also used by banks and other lenders, mortgage lenders, public officials, and public utilities.
Contractors: Surety bonds for contractors are required for a range of purposes. Bid bonds are typically used to ensure that the contractor will honor the bid amount if selected as contractor. Performance bonds assure the customer that the contractor will be able to complete the job.
Materials supply: Material bonds assure the customer that the contractor will pay suppliers.
Employee dishonesty: Employers typically seek this type of surety bond to protect them in the event that an employee commits fraud or theft.
Automobile dealers: Motor vehicle dealers in North Carolina are required to have a surety bond in place in order to operate. A surety bond for motor vehicle dealers is meant to guarantee compliance with the law.
Real Estate agents / brokers: Real estate agents, all salespersons and qualifying brokers must have a minimum $25,000 trust account surety bond in place.
Public Officials: Individuals elected or appointed to local office in North Carolina are required to post surety bonds for the faithful performance of their fiduciary duties.
Banks and other lenders: Business owners and bank employees with access to merchant accounts are typically required to post a surety bond in order to assure the bank that they will not cause financial harm to the institution.
Public Utilities: Private utility providers must usually obtain a surety bond as a protection for the general public/Waste management companies, taxis, buses, ready-mix concrete, wrecker services.
How to Acquire a Surety Bond in North Carolina
The process of obtaining a surety bond in North Carolina generally involves the following steps:
Firstly, the principal must determine which type of bond is needed for their specific purpose, as there are various bonding categories including but not limited to contractor bonds, notary bonds, and license and permit bonds, which are required by various North Carolina statutes. Secondly, the principal must choose a surety bond provider. The principal has many choices and can do some due diligence by checking the provider’s credit rating and/or reputation. Thirdly, the principal must completely fill out the application for the bond and gather the appropriate documentation. This will likely include a credit report, a financial statement, and identification. It should be noted that if the surety bond in question involves a contract, the principal will be required to provide their work contract with the obligee of their bond. Next, the surety bond provider will assess the principal’s application. Based on the information contained in it, the surety company will make a determination as to whether or not it is willing to provide the bonding coverage. This process is often referred to as underwriting the bond application. If approved, the surety provider will set forth the criteria under which it will provide the bond. If the surety company agrees to provide the bond, the principal will be required to sign an indemnity agreement in which the principal agrees to indemnify the surety from all loss and related expenses, and assigns collateral security to the surety in a specified amount. Finally, the principal pays a premium for the agreed upon bonding coverage. Once an initial premium is paid, the bond is then issued, and the principal submits a copy of their bond to the regulatory authority. Although a surety bond can be obtained directly from a surety bond provider, they are often obtained through a surety broker, who has direct access to all surety companies. By using a surety broker, the principal is afforded the opportunity to compare the product, service, and pricing of all companies.
Surety Bond Pricing in North Carolina
In North Carolina, the cost of a surety bond is influenced by a few core factors. First and foremost, the surety bond amount is likely to affect the cost for the bond applicant. A higher bond amount usually results in a higher bond premium. In addition to the bond amount, the type of surety bond also has an impact on the bond premium. For instance , a notary bond will likely have a different bonding premium than a motor vehicle dealer bond (which is a collateralized bond). Other types of bonds (such as license and permit bonds) for a sole proprietorship may be less costly than bonds for other entities.
Past performance is another factor used to determine the bonding premium. Because of this, your credit score and financial history are reviewed by the surety agency prior to issuing your bond. If you possess good credit and/or have a good financial history, the cost may be lower than if you don’t meet these two criteria.
Implications of Not Having a Surety Bond
Failure to meet surety bond requirements can be costly. For those who relied upon the surety bond to meet a required state licensing or permit requirement (such as general contractors, electricians, HVAC contractors, and plumbers), the business opportunity is lost until the bond is in place.
For those who accept deposits or receive advance payments from clients, if you do not have the required bond (or other required security) in place, the client may be entitled to recovery from you for any lost money. Even if you do have a bond in place, your failure to strictly comply with the requirements of the contract may void your bond.
Finally, for those that suffer financial harm or damage, you might be able to seek recovery from the bonding company under your bond (if you are a licensed contractor) or in some cases seek a bond forfeiture (as a consumer) if you can show that the licensed contractor has failed to comply with the requirements of the contract.
North Carolina Surety Bond FAQ
How long do I have to obtain a bond after the date of the contract?
Under North Carolina’s Prompt Payment Laws, the owner shall not unreasonably delay the execution of the written contract or the issuance of the payment and performance bonds.
I’ve heard I need to renew my bond every year. Is this true?
Not necessarily. That depends on the terms of the contract and any extensions of time that may be issued for the project. If there are no modifications for the term of the contract, then the bond will not need to be renewed . Be sure to check the specific language of your bond.
What should I do if a claim is made by an owner against my bond?
The surety will typically notify the bond applicant and the obligee of the claim and disclaim liability. This disclaimer serves as a defense to any claim for fraudulent misconstruction against the surety. In the event of a disputed claim, a surety bond dispute letter will be sent to both parties of the bond by the surety.