Playing Your Part As A Bond Principal

As a contractor, you must render services to your clients correctly. Most clients want to ensure that they won't lose money by working with you. Therefore, they require their contractors to carry surety bonds.

Bonds function like an insurance policy in many ways. If you (the principal) cannot complete your work, then your client (the obligee) will make a claim on the bond. The surety company that issued the bond will process the claim. Depending on the outcome, they might issue a payout to the obligee.

However, even if the surety company pays the bond, that doesn't let the principal off the hook. The principal will likely need to repay the surety company. This is one way in which bonds differ from standard insurance. The principal still has a financial obligation to the affected client. To maintain your part of the deal, here are a few steps you should take:

1. Understand Your Role in the Contract

Contractors always need to know what their clients expect of them. When entering a contract, review it carefully with the help of your legal counsel. In most cases, you can negotiate aspects of contracts. This might help you make adjustments to better ensure project success.

2. Get the Correct Bond and Provide Information to the Client

Some principals carry bonds to guarantee their services to a wide range of clients. However, other obligees might require specific bonds in the terms of their contracts. Always secure a bond that meets both yours and the client's needs. Then, provide proof of bonding to the principal. They need to know how to make a claim should a problem arise.

3. Keep Your Bond Active

As with insurance, you will pay a premium to keep your bond active. This is generally 10 to 15 percent of the bond's total value. You have to keep your premium up-to-date to keep the bond active. Failing to pay the premium might result in cancellation of the bond. Therefore, work with the surety company to find the best way to keep the bond affordable.

4. Report Claims Appropriately

Should a client file a claim against your bond, it's your job as the principal to work with them and your surety company. You should be ready to provide material support to help the surety company process the claim. Work with the surety company to cover any cost obligations you might have when settling the claim.

If you need more information on surety bonds, contact a Southwest Commercial Insurance agent today. We can help principals enroll in the protection they need.