Bonds Function as a Type of Insurance

New Jersey requires contractors to secure a license and permit bonds for the jobs they bid on and the work they commit to doing. This is due to the fact that surety bonds ensure the completion of the project as agreed upon. Bonds offer protection in the event that the contractor defaults or fails to complete the job to the satisfaction of the client.

These bonds, unlike insurance policies drafted by the insurer, and in the case of a public project, are designed to meet the requirements of a statute or of any applicable administrative regulations. In most instances, the provisions of the surety bond favor the obligee. The surety is the insurance company that backs the bond. The surety provides a line of credit in case the principal fails to fulfill the task. The obligee is the entity that requires the bond. An obligee is typically a government agency working to regulate industries and reduce the likelihood of financial loss.

Bonds typically used by contractors

An obligee may find cause to modify any one of the bond forms in order to further expand the surety’s liability or restrict any recourse by the surety attempting to use traditional common law defenses. The most common bond forms in use today are bid bonds, performance bonds, and payment bonds.

An obligee may, as a result of bad experiences with contractors, change or redesign a bond to include a certain specific language with regard to damage. For example, an obligee may seek to alter a surety bond to extend the surety’s liability or restrict its ability to mitigate its losses.

One way is to extend the obligations of the surety beyond the commitment to arrange and/or pay the net additional cost for the performance of the balance of the contracted work.

They could deny the surety the option to utilize its defaulted principal in the performance of the contract or shorten the time frame within which the surety may assert any defenses.

These are a few prime examples of how surety bonds and performance of contractors may be regulated. Speak to an experienced agent about any questions or concerns regarding the use of bonds when jobbing out projects.