A little History on Surety Bonds…
Individual surety bonds represent the original form of suretyship. The earliest known record of a contract of suretyship is a Mesopotamian tablet written around 2750 BC. Evidence of individual surety bonds exists in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, among the ancient Hebrews and (later) in England.
Suretyship was not always accomplished through the execution of a bond. Frankpledge, for example, was a system of joint suretyship prevalent in Medieval England which did not rely upon the execution of bonds.
In 1865, the Fidelity Insurance Company became the first US Corporate Surety company, but the venture soon failed.
In 1894 congress passed the Heard Act which required surety bonds on all federally funded projects. In 1908 The Surety Association of America, now The Surety & Fidelity Association of America (SFAA) was formed to regulate the industry, promote public understanding of and confidence in the surety industry, and to provide a forum for the discussion of problems of common interest to its members. SFAA is a licensed rating or advisory organization in all states and is designated by state insurance departments as a statistical agent for the reporting of fidelity and surety experience. The SFAA is a trade association consisting of companies that collectively write the majority of surety and fidelity bonds in the United States. Then in 1935 the Miller Act was passed replacing the Heard Act. The Miller Act is the current federal law mandating the use of surety bonds on federally funded projects.
Surety Bonds: Contract bonds, used heavily in the construction industry by general contractors as a part of construction law, are a guaranty from a Surety to a project’s owner (Obligee) that a general contractor (Principal) will adhere to the provisions of a contract. The Associated General Contractors of America, a United States trade association, provides some information for their members on these bonds. Contract bonds are not the same thing as contractor’s license bonds, which may be required as part of a license.
Included in this category are bid bonds (guaranty that a contractor will enter into a contract if awarded the bid); performance bonds (guaranty that a contractor will perform the work as specified by the contract); payment bonds (guaranty that a contractor will pay for services, particularly subcontractors and materials and particularly for federal projects where a mechanic’s lien is not available); and maintenance bonds (guaranty that a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are subdivision and supply bonds. Bonds are typically required for federal government projects by the Miller Act and state projects under “little Miller Acts”. In federal government, the contract language is determined by the government. In private contracts the parties may freely contract the language and requirements. Standard form contracts provided by American Institute of Architects (AIA) and the Associated General Contractors of America (AGC) make bonding optional. If the parties agree to require bonding, additional forms such as the performance bond contract AIA Document 311 provide common terms.
Losses arise when contractors do not complete their contracts, which often arises when the contractor goes out of business. Contractors often go out of business; for example, a study by BizMiner found that of 853,372 contracts in the United States in 2002, 28.5% had exited business by 2004. The average failure rate of contractors in the United States from 1989 to 2002 was 14 percent versus 12 for other industries.
Prices are as a percent of the penal sum (the maximum that the surety is liable for) ranging from around one percent to five percent, with the most credit-worthy contracts paying the least. The bond typically includes an indemnity agreement whereby the principal contractor or others agree to indemnify the surety if there is a loss. In the United States, the Small Business Administration may guaranty surety bonds; in 2013 the eligible contract tripled to $6.5 million.free trial music class AZ liquor bond provider