Construction professionals in the D.C. area are probably familiar with the district's various surety bond requirements. Unfortunately, most contractors have a limited knowledge of contractor bonding beyond the fact that they need it before working on certain construction projects. Contractors should fully understand the legal implications of bonds before they purchase them so they know what they're getting into — otherwise they might find themselves in court.
How do surety bonds work?
Although insurance companies typically underwrite contractor bonds, the protection they provide is very different from insurance policies. When underwriting insurance policies, companies assume a certain amount of risk is involved. This is not the case with surety bonds. Unlike insurance companies, surety providers intend to avoid any and all claims, which is why getting a surety bond is often much more difficult than getting an insurance policy. Furthermore, whereas insurance policies involve only the policy holder and the insurance company, surety bonds involve three entities.
- The obligee, typically a government agency, requires the bond to regulate the market and protect against financial loss.
- The principal, a construction professional, buys the bond as a legal guarantee of future work performance.
- The surety financially backs the construction bond as a show of good faith in the principal's ability to complete the project.
