- September 14, 2022
- Posted By:hmvreeland
- Category:Surety Bonds
A Surety bond in Los Angeles is a legally binding contract between three parties – the Principal, the Obligee, and the Surety. It guarantees that the Principal will perform a duty or contract. The Principal is the person or organization that buys the bond, the Obligee is the organization that requires the Principal to buy the bond, and the Surety is the company that financially backs the bond.
The Miller Act – a law passed by Congress in 1935 – makes it mandatory for contractors bidding for federal public work projects to obtain a Surety bond. There are several benefits of Surety bonds. They reduce the risk of liens filed by laborers, suppliers, & contractors and protect taxpayer dollars.
Here are some interesting lesser-known facts about Sureties.
They are Really Old
Sureties are not a new concept. Governments have been using Surety bonds since time immemorial to ensure contracts are completed in a timely fashion and contractors meet the obligations of contracts. Sureties were mentioned in the ancient code of Hammurabi and some of the oldest books known to man, including the Bible and the Quran. The Roman empire was one of the first empires to use Sureties! It required contractors to obtain Surety before constructing buildings and highways.
They are Not Insurance
Many people wrongly believe that insurance policies and Surety bonds are one and the same. Both insurance and Surety are regulated by state insurance commissioners and both are risk transfer mechanisms. However, that’s where the similarities end. Insurance is a contract between two parties, whereas, Surety is an agreement between three parties.
In traditional insurance, the risk of loss is transferred to the insurance company. Whereas, in Surety, the risk of loss remains with the Principal. The premium paid by the Principal is the service fees charged by the Surety for the use of the financial backing and guarantee offered by it. In traditional insurance, the insurer uses the premium or some portion of it to cover losses if a claim is filed.
The Heard Act Preceded the Miller Act
Not many people know that the Miller Act was preceded by the Heard Act, which was passed in 1894. The act was designed to protect the government from financial losses that may arise if a contractor became insolvent before completing a project. The act also ensured that subcontractors, laborers, and suppliers would be paid. In 1935, it was replaced by the Miller Act which introduced stricter guidelines.
Surety Bond Premiums Can Be Different
Surety bond premiums can vary from 0.5% to 5% of the contract amount. Depending on your creditworthiness, you may be required to pay a lower or higher premium. Other factors that can affect premium include the size, type, and duration of the project.
H.M. Vreeland is committed to simplifying the process of obtaining a Surety bond. Whether you need an appeal bond or a contract bond or any other type of Surety bond, we can help. To request a quote, call (415) 566-3401.