A Surety Letter can be used like a bid bond. It may be required by private owners (and General Contractors in connection with subcontracts) as a means of assuring the contractor / bidder can provide a Performance and Payment Bond upon award of the project. Private owners are not the only ones who use this procedure. You may even run into this requirement on public jobs.
The Surety Letter is a statement of the principal’s (contractor’s) ability to provide a surety bond. They may seem like an easy and useful alternative to a bid bond. After all, it’s a letter. That has to be easier than a bid bond!
Cost
Theoretically, bonding companies are entitled to charge for bid bonds. They are binding financial obligations and sureties occasionally pay out claims on these. The industry practice, however, is to waive such charges.
When it comes to the surety letter, there is no financial obligation. They are usually issued for no charge. You can’t make a claim on one, and they are not a guarantee that a P&P bond will be provided.
So when a surety letter accompanies a proposal, exactly what does the project owner get?
The key points are:
- Sufficient Authority Who wrote the letter? The best letters are written directly by bonding companies on their letterhead. This is important because the author can bind the surety company. If they say they will provide a P&P bond, you can take that to the bank. Less effective letters may be written by individuals who are not direct employees of the bonding company and who may not be able to legally bind them. Hint: The letter is stronger if a power of attorney is attached.
- Escape Hatch Typically these letters have a disclaimer that says there is no promise to provide a P&P bond. It may say the underwriter reserves the right to approve or disapprove performance bonds based on the client’s circumstances at the time the bond is requested. (Question: Do bid bonds have an escape hatch? See below *)
What does all this mean? When a surety letter is used, it always proves one thing: The contractor has some form of a bonding relationship.
However, depending on the content of the letter, it may not include any form of commitment. Such letters are an “indication of bondability” leaving the reader to speculate whether a P&P bond will follow.
To what extent can the project owner rely on a surety letter? Considering most are only an “indication,” not much! Bid bonds are binding obligations assumed by sureties, and claims can be filed against them. If they both are available for little or no charge, which would you rather have?
* Answer: Bid bonds never contain an escape hatch. If, upon award, an acceptable P&P bond is not provided, the surety will likely face a bid bond claim.
FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision, Bid and Performance Bonds since 1979 – we’re good at it! Call us with your next one.
Steve Golia, Marketing Mgr.: 856-304-7348
A bid bond is not an absolute guarantee a low bid will be followed with a performance and payment bond. A Surety can refuse final bonds given the right circumstances.
Bob Lagler
Phoenix Surety & Insurance Agency
Yes Bob, we agree!
If that happens (and we know it does), the client has the option to bring in a new surety for the P&P bond. Absent that, the bid bond surety faces a claim.