License Surety Bond

License bonds and permit bonds are both types of commercial surety bonds that are required prior to obtaining licensing or permits for a construction project. Almost any type of commercial or residential real estate development or construction project requires permits and licenses from state or municipal agencies in order to perform and complete the work. A license or permit surety bond provides assurance that the contractor will obtain these needed documents.

The parties involved in a surety bond

In a surety bond, there are three parties:

• the principal: usually the contractor who performs the work outlined in the contract
• the obligee: the person or organization for whom the work is performed
• the surety: a neutral third party, usually an insurance company, that oversees that all contractual obligations are fulfilled by the principal.

A typical license surety bond contains a penal sum provision. The penal sum is the amount of money that the principal must pay to the obligee in the case that the license or permits are not obtained as required. The penal sum is a deterrent to principals for avoiding the responsibility of getting licenses and permits.

Performance Surety Bond vs. License Surety Bond

In general, a license surety bond is an additional bond required on top of a performance or contract surety bond.

A performance surety bond is a type of bond that mandates a surety to assure the principal performs all duties outlined in the construction contract on time and within budget. If the principal fails to complete the contract or is in default of the contract, then he or she may be held liable to repay the obligee for the costs and outlays up to that point. The contracting company owner may also be held personally liable for losses incurred.

A contractor generally obtains the license surety bond when a construction project is formed and a general contracting company hired. Licenses and permits must be obtained before work is begun to prevent the obligee or owner of the property from being charged penalties and fees. The license surety bond assures that these penalties will be avoided.

Getting the bond

Like any surety bond, a principal must submit a license surety bond application to the surety company before the bond is granted. The application process may consist of:

• a general information application form
• important financial and credit information about the principal organization
• years of financial documents submitted to ascertain whether the contractor is a profitable company that is not in danger of becoming insolvent.

Surety bonds vs. insurance contracts

A license surety bond is not an insurance contract. Unlike surety bonds, insurance contracts are agreements from an insurance company to pay a stated amount in the unforeseen case of an action, such as an automobile accident or fire damage to a home. On the other hand, a surety bond has a determined outcome and allows the surety company to underwrite and assess the risk involved with completing a contract. This is why so much information is needed from the principal before a surety will agree to issue the bond.

Summary

License surety bonds, as well as all other types of surety bonds, have been used since the ancient Egyptians. Surety bonds help the obligee maintain a certain level of confidence that the principal will perform the duties they were contracted to do. Make sure you talk with your general contractor about any performances that may require a surety bond, and find a good surety agent that can issue the bond.