There’s no question about it. The only reason bonding companies issue surety bonds is because they want your money. But how, when, and if you pay are all up for grabs!
Let’s look at some of the realities and options when it comes to paying for surety bonds.
INSURANCE – You may know that you can pay for insurance with installments. You may also finance the premiums. Eventually, if you fail to pay the installments, the coverage is cancelled. It is this ability to terminate the exposure that enables the insurer to offer payment terms and the finance company to assume the risk.
COMMERCIAL BONDS – These common types of bonds are usually issued for low amounts. For example, the face amount on license and permit bonds may be $5,000 or less. The premium on them is low and may be a minimum charge. Such bonds may contain a cancellation clause.
These facts may seem to make installments possible, but the practice is often to require payment in advance. It could be that for a small premium or commission, the issuer is not willing to face any collection problems or related expenses.
CONTRACT SURETY: BID BONDS – Bid bonds are not issued until the underwriting is completed, so the surety always incurs expenses.
Another fact: You can have a claim on a bid bond and the surety could suffer a net loss. So there are costs and exposures attached to these instruments. Bonding companies normally have filed rates that entitle them to make a charge for every bid bond. But do they? No! The majority of sureties do not charge for them. “Free bonds!” Their motivation could be that the fee is so small; it is unprofitable to bill it.
PERFORMANCE AND PAYMENT BONDS – These obligations are typically irrevocable. Put simply, if the surety issues the bond and bills later, they cannot terminate the obligation for failure to pay. Even a casual observer would be forced to conclude that P&P bonds MUST be paid for in advance. It’s logical, but the industry practice is often to wait 45 to 60 days until the client has collected their first payment on the contract. This gives the contractor the luxury of not having to “front” the bond fee.
A portion of the industry does charge in advance for P&P bonds. You’ can’t argue with their logic!
COURT & PROBATE – These bonds are normally paid for in advance, and may be fully earned upon issuance. In a legal action, the mere ability to issue the bond can have a beneficial effect for the applicant. Knowing this, sureties would be foolish to offer any form of return premium.
PREMIUM FINANCING – This would seem to be the client’s solution to the pre-payment requirement, but most finance companies will not support bonds due to their non-cancellable nature.
If you’ve been looking for the thread of logic, there is none!
Billing practices are traditional, and may not make much sense. We should charge for bid bonds but often don’t. A bid bond for a large project could cost more than a small one.
P&P bonds should be paid in advance but we often collect payment later.
Since the methodology defies logic, you must ask the underwriters in every case. Don’t assume you can predict when to pay or if you have to pay for it at all!
KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating. We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.
If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348
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