Surety Bonds Pennsylvania Policy Information
Surety Bonds Pennsylvania. A surety bond is a three-party contract. The parties are you or your business, known as the principal, the customer, known as the obligee, and the surety company, known as the surety.
Surety bonds exist to protect the obligee. Many companies and government agencies will only sign contracts with companies who have them, as they can:
- Protect against financial loss in the event that promised labor is not performed.
- Protect against liability in the event that the work causes damage.
- Protect the obligee from financial losses in the event that one of your employees steals from them, or commits fraud.
PA surety bonds are what contractors are talking about when they say they are "licensed, bonded, and insured," but they aren't the only ones who require them.
There are many types of surety bonds Pennsylvania covering many types of situations and industries.
Surety bonds Pennsylvania protect your business by reassuring customers they will receive your service as promised - with rates as low as $7/mo. Get a fast quote and your proof of bonding now.
What's The Difference Between Surety Bonds And Insurance?
Here's the biggest difference: business insurance exists to protect you. Surety bonds exist to protect your customer.
Insurance pays you when you take a loss so you can replace whatever you've lost. It is a two-party contract between you and the insurance company.
Surety bonds Pennsylvania pay the customer if the customer has suffered a loss. They then require you to pay back the amount they paid to the customer. You can think of them as lines of credit that kick in when you can't complete a project, when one of your employees causes a problem, or when there's no way to avoid breaching a contract.
Even though bonding is not insurance, many insurance companies offer them.
Surety bonds and insurance policies are similar but there are some very distinct differences. Besides having different contract language, they differ in the coverage they provide. The following chart identifies the most important differences:
|Principal / Obligor / Contractor.||Similar to liability coverage because only the actions of the party that pays the premium can trigger a claim from the obligee.|
|Owner / Obligee.||Similar to a first party insured or a third party claimant in that the insurance company compensates for covered loss. However, the only loss a surety contract pays is one where principal does not perform according to contract terms.|
|Penalty / Penal Sum.||Limits of Liability/Limits of Insurance.|
|Three-party (Tripartite) Agreement.||Two-party Agreement.|
|Term of Obligation is indefinite and lasts until the contractual obligation is complete. Cancellation is not an option.||Term of Obligation is for the specified policy period or term. Cancellation and non-renewal rights are part of the policy.|
|What is covered? Performance||What is covered? The perils or causes of loss listed in the policy or coverage form.|
|Is subrogation possible? The surety may subrogate against the principal for any loss paid to obligees, subcontractors, and material suppliers.||Is subrogation possible? The insurance company may subrogate against only third parties.|
|Is indemnity available to surety for loss caused by principal/insured? Yes. The surety can pursue the officers, stockholders, corporations, and affiliated partnerships on behalf of principal.||Is indemnity available to insurer caused by principal/insured? No.|
Examples Of Surety Bonds
Surety bonds are essentially contracts, and, like contracts, can be structured in a variety of different ways. For a surety bond glossary, visit: Surety Bond Definitions And Meanings. There are four broad categories of surety bonds that you may require:
Construction companies and contractors are the ones most likely to become the principal on this type of bond. It will typically outline the work to be performed, and the quality of the work expected. It will also outline the timeline in which the work is to be completed.
There are three primary types of construction contract bonds:
- Bid Bonds
- Performance Bonds
- Labor and Payment Bonds
Different bonds and different pricing are necessary because each phase of the construction process involves a different set of risks.
Contractors never know their final construction costs until their work is complete. The longer the projected completion time, the more exposure contractors face from numerous variables that can dramatically affect the final outcome.
That is why the party who tries to assess a job's full cost of labor, materials, sub-contractors, and other job-related expenses is often referred to as an estimator. The period between the estimating stage and the final "punch list" immediately before the owner accepts the job can be very long. Various obstacles may arise along the way and this is where the protection a surety bond provides enters the equation.
The surety provides contract-bonding service with two different bonds:
- The first bond assures that the contract will be performed.
- The second guarantees that proper labor and material bills for contract-related work will be paid.
Many states, cities, counties, townships, and villages follow the language within the Miller Act, enacted by the U.S. Congress in 1935. This Act requires a separate Labor and Material Payment bond for federal public works and building contracts in addition to the Performance bond. The state and local contracts that follow the federal Miller Act contracts are commonly referred to as “Little Miller Act” contracts.
Private construction projects also use this dual bond approach because the separate payment bond minimizes the need to file labor and/or material liens against the owner's property that might encumber its title. While a lien for non-payment of labor and material bills cannot be attached to public property, it is considered good public policy to assure such payment. This practice avoids forcing material suppliers to add excessive price loads in order to address otherwise unsecured risks.
Performance bonds give the owner financial protection against contractor default, guarantee against defective workmanship or materials, and encourage adhering to the contract's provisions. An excellent by-product of the guarantee to pay labor and material bills is the elimination of possible expense, litigation, and embarrassment to the owner that arises from unpaid contractors' bills.
If a contractor defaults, the surety is usually responsible for obtaining bids from contractors to complete the job and awarding the remaining work to the successful bidder. The owner may want to participate in this process and the surety generally welcomes it doing so. However, if the owner is permitted to participate, it is nothing more than a courtesy because the surety has total control of the bidding process and it alone awards the contract for work.
Contract bonds rarely explain the specific liability of the contractor and the surety. The contract's obligations, the requirements of the plans and specifications, and the statutes that apply to the work are the controlling factors.
You may also see payment bonds, which warrant that you'll pay all of your subcontractors and suppliers. This is important to many customers because it protects them from getting a lien on their property in the event you fail to uphold your financial obligations.
License And Permit Bonds
There are literally hundreds of License and Permit bonds. The number of these bonds increases regularly because new forms are developed after nearly every meeting of state legislatures and other legislative and regulatory bodies.
License and Permit bonds fall into three general categories:
- Code Observance and Good Behavior Bonds: This category of bonds applies to businesses such as plumbers, electricians, sewer installation, and retail liquor establishments. These bonds guarantee that the principal will comply with applicable health or safety laws or regulations. They are the most freely written and least hazardous bonds because their primary purpose does not involve paying money.
- Tax or Money Remittance Bonds: Examples of this category include gasoline tax bonds, most federal liquor, beer, and wine bonds, milk dealer bonds, and commission merchant bonds. These bonds guarantee that the principal will pay money due to others and are considered financial guarantees. Coverage is underwritten carefully because of the financial guarantee. Most sureties want to write only experienced and financially responsible applicants.
- Property Damage and Personal Injury Bonds: Examples in this category are blasting bonds, permit bonds for hauling or storing explosives, fireworks display bonds, and certain motor vehicle bonds. Most sureties require that the applicant be experienced and financially responsible. In many cases, they require underlying and excess liability insurance coverage as a safeguard.
An interesting characteristic of modern business is its virtually unlimited variety, ranging from simple and basic business enterprises to huge multinational corporations. Despite the many differences between the various types of businesses, each must meet two underlying requirements in order to operate:
- A license or a permit that a federal, state, county, or municipal governmental entity issues in order to conduct operations in general and/or to exercise a special privilege.
- A corporate Surety bond to support the license or permit.
Licenses or permits are interchangeable terms. They are required when the public interest demands regulating certain types of business in order to protect its citizens and/or public and private property. A license or permit that is issued is considered a special privilege. The licensee must justify the privilege by complying with the terms of codes or standards of conduct outlined by law, ordinance, or regulation. The codes and standards are usually designed to prevent abuse of the privilege to the detriment of others.
License and Permits bonds are issued every day for a variety of activities. As a result, a comprehensive listing of all of them is not practical. The following is a brief list of some of the more common License bonds available:
- Airport Permits
- Athletic Contests
- Automobile Dealers
- Beauty Parlors
- Blasting Permits
- Bowling Alleys
- Building Permits
- Business Schools
- Certified Public Accountants
- Cigar and Cigarette Manufacturers
- Cold Storage Warehouses
- Collection Agencies
- Contractors (All Kinds)
- Dealers of Motor Fuels
- Driver Schools
- Electrical Contractors
- Employment Agencies
- Fishing Licenses
- Fruit & Vegetable Dealers
- Funeral Directors
- Garbage Collectors
- Gasoline Filling Stations
- General Contractors
- Heating Contractors
- Highway Permits
- House Trailer Permits
- Insecticide Applicators
- Insurance Agents or Brokers
- Junk Dealers
- Laundry or Dry Cleaners
- Liquor (all applications)
- Livestock Auctions
- Masonry Contractors
- Mortgage Brokers
- Motor Vehicle Dealers–New and Used
- Moving Permits
- Oil and Gas Leases and Well Drilling
- Paving Contractors
- Plumbing Contractors
- Private Schools
- Processing Plants
- Public Adjusters
- Real Estate Brokers
- Retail Merchants
- Roofing Contractors
- Secondhand Dealers
- Securities Dealers
- Sewer Contractors
- Sign Hangers
- Specialty Contractors
- Storage Companies
- Street Obstruction
- Towing Operators
- Trailer Dealers
- Transportation Brokers
- Tree Trimmers
- Used Car Dealers
- Vocational Schools
- Warehouses and Grain Elevators
- Water Well Drilling
- Window Cleaners
- Wrecking Operations
This type of bond assures the obligee that the principal will comply with any regulations required by their state licensing board. This protects the obligee from liability in the event that the principal fails to do so.
Some of the commercial bond subtypes may surprise you. For example, if your business uses a lot of electricity the electric company might require you to get a utility bond promising you'll pay all of your bills. If you're in a state that has a sales tax, the state may require a bond stating you'll pay all of your sales taxes on time.
This type of bond protects the customer from financial loss in the event that you or one of your employees commits fraud, or steals from them. This type of bond is a great idea for any company who is sending employees to a customer's location.
In many states, having a fidelity bond goes hand-in-hand with acquiring a business license. You'll need to check your state laws to find out if this applies to you.
Litigants in legal actions or court proceedings are required to have court bonds. These bonds enable them to pursue a remedy in court.
Determining whether a specific bond is an acceptable risk involves considering a number of different factors. They include (but are not limited to) the type of legal action, the details of the guarantee required, the principal's financial responsibility, the nature of the property involved, and the nature and degree of counter replevin available.
Note: Replevin is an order the court issues to allow the plaintiff to take possession of property before a final judgment is rendered.
Court bonds are guarantees that are either required by law or by a rule of the court. They must be filed in connection with litigation. They permit participants in a lawsuit to pursue certain legal remedies in court and are required of one party to an action at law for the benefit of the other party. Once they are filed, a vested interest in them is established that the obligee (the party in whose favor the bond runs, such as the party protected from loss under the bond) cannot be deprived without its consent.
For this reason, Court bonds do not have a cancellation clause or a statutory provision to release the surety. They are irrevocably binding on all parties until all parties agree to terminate them or until the court case is settled and the principal (the party whose honesty, fidelity, or ability to perform is guaranteed) performs all obligations imposed on him or her.
Court bonds protect the rights of individuals whose property is in dispute while a remedy is being pursued in court.
You're probably already familiar with the concept of a bail bond. Bail bonds are quintessential surety bonds: you make your court date, or you pay the price.
Bail bonds aren't the only type of court bond. For example, pre-existing contracts may require plaintiffs to take out this kind of bond in the event that they sue the obligee. The contract would then require the plaintiff to pay the defendant's court costs and losses if the defendant loses.
Who Requires Surety Bonds?
Large corporations, government agencies, and municipalities almost always require a surety bond before agreeing to do business with a company. Some state laws and regulations require certain business types to carry bonds as well. For example, in many states you must have commercial and fidelity surety bonds to run an auto dealership.
Sometimes it will be a good idea to set up a surety bond even if nobody requires you to have one. If you're forced to issue a refund to a client or customer having a line of credit in place to help you deal with the problem could come as a god-send.
Always Uphold Your End Of The Agreement
Some problems are unavoidable, but your goal should always be to fulfill your obligations to the letter so your customer has no cause to make a claim against the bond.
Every time a customer makes a successful claim your costs go up. Too many claims can make it impossible to get a bond, which can vastly restrict your opportunities, or even put you out of business. High-risk bonds do exist, but you'll want to avoid them if you can.
Still, surety bonds Pennsylvania fulfill a vital function. They provide you with more protections against risk, and offer you the resources to deal with major issues as they arise. In some cases, bonds can be a lifesaver for businesses who might otherwise have gone under after something went wrong.
How Much Does A Surety Bond Cost?
The cost of the bond will usually be a percentage of the bond amount. The actual bond amount, and the percentage, will vary depending on your industry, your company's reputation and credit rating, and even the surety company's assessment of your ability to uphold your end of the agreement. The length of the bond matters, too.
The law of large numbers is a key integral component to most primary insurance lines of coverage. This law anticipates collecting sufficient premium from all policyholders to cover the losses of the few. Pooling premiums to respond to injury or damage sustained by certain members of that pool is how insurance works.
However, that approach does not necessarily apply to corporate suretyship. The premium for any type of surety bond is not treated as an amount that can be held in reserve to make payments. On the contrary, it should be considered as a fee for the bond. When losses occur, they are paid out of the surety's assets, surplus investment income, and contingency reserve. After the surety fulfills its obligation, it assumes the principal's rights, because it has already handled the principal's financial responsibilities. Once an obligee receives a surety bond, that bond is valid, even if the principal never pays for it.
The surety bond does not have any cancellation provisions for non-payment of premium. In addition, the rights of the obligee cannot be invalidated unless the bond has an express provision that permits it.
Surety Bond Underwriting
The surety underwrites the risk based on the three Cs: Capital, Character, and Capacity. Most grantors of surety credit, commercial bank loan providers, and many other firms that extend credit as a normal business risk use these credit evaluation standards.
Many grantors of credit use a fourth C, Collateral, to support unusually hazardous surety obligations. Collateral is also routinely used with extending many commercial bank loans. The additional support that collateral provides for a credit risk does not necessarily challenge the credit worthiness of the bond principal or the party that seeks a loan. However, under contract suretyship, the requirement for collateral by standard surety markets (defined as conventional underwriters usually affiliated as members of or subscribers to the Surety and Fidelity Association of America) is highly unusual. One situation when such requests are made is when a contractor previously defaulted in performing bonded work.
Surety obligations (and contract bonds in particular) frequently depend on the officers and directors of a corporation to personally indemnify the surety against any loss it may sustain by reason of executing the bonds on behalf of a corporate principal.
The surety's and lender's respective means of recourse against default is similar. An unsecured lender has essentially the same legal remedies available to it against its defaulting borrower in civil proceedings as the surety does against its defaulting principal. In the surety business, this is known as the right of equitable subrogation. If the lender had a guarantor or co-maker supporting the borrower on its security instruments, these third parties are the equivalent to the surety's part as the guarantor to the obligee on a bond.
Surety Bonds Pennsylvania - The Bottom Line
Bonding underwriting guidelines are complex, and will require you to provide the surety company with a great deal of information. Your insurance agent can help you navigate the process, and can help you choose the right PA surety bond for you.
Pennsylvania Economic Business Outlook & Commercial Insurance Requirements
While you might have a fantastic idea for a business, if you aren't setting up shop in the right PA location, there's a good chance that you won't see the success that you hope to achieve. With that said, it's important that you have an understanding of the economic status of the state that you are thinking about doing business in. It's also important for you to know what type of rules and regulations regarding insurance are in place in that state.
If you are thinking about doing business in the Commonwealth of Pennsylvania, keep on reading to find out some valuable information that you can use to make the best choices for your operation.
Pennsylvania's Economy Now And Into The Future
In terms of the economy, Pennsylvania's future looks pretty bright. It boasts the sixth largest economy in the United States. It is also home to some of the largest private and public organizations in the nation, as per sales.
The job market is expected to see steady growth in Pennsylvania during the 2020 calendar year. That rate is expected to be 1 percent, which is a marked increase from previous years. This is largely due to the high pool of educated laborers that reside in the state. Currently the unemployment rate is 4.9 percent, which is on-par with the rest of the nation. It is believed that the unemployment rate will continue to drop as more jobs are added.
For business owners, there are several industries that will afford success. The food products industry, particularly related to agriculture, contributes largely to the state's economy. This is expected to continue moving forward throughout the 2020 calendar year. Other industries that are forecasted to see growth include:
- Printing & Publishing
If you are thinking about doing business in PA, working in one of these industries will likely afford you success.
Insurance Requirements For Businesses In Pennsylvania
The Pennsylvania Insurance Department regulates insurance in PA. Business owners are legally required to carry workers compensation insurance. This type of coverage is a must for any business that employs any W2 part-time or full-time employees, and for employees that are either hourly or salaried. You must also carry PA commercial auto insurance if you plan on using a vehicle to conduct anything related to your business.
While commercial liability insurance is not required in Pennsylvania, it is still a wise idea to invest in. This type of coverage will protect you from the cost of any lawsuits that could potentially arise.
Additional Resources For Miscellaneous Insurance
Find informative articles on miscellaneous businesses including the types of commercial insurance they need, costs and other considerations.
- Adult Daycare Insurance
- Agriculture, Forestry, Fishing & Hunting
- Bail Agent
- Control of Well
- Employment / Staffing Agency
- Engraving Business
- Facility Support Services
- Mail Order
- Oil And Gas Lease
- Personal Concierge
- Photofinishing Lab
- Portable Sanitation
- Printers & Publishers
- Private Water Districts
- Process Server
- RV Parks & Campgrounds
- Security Guard
- Surety Bonds
- Unmanned Aerial Vehicles (UAV) Drone
- Waste Disposal Landfill
- Wedding Planner
An insurance contract is an agreement where one party obligates itself to make good the financial loss or damage sustained by a second party when a designated event occurs. The event must be fortuitous and happen by accident. The named insured must have insurable interest at the time of loss. One final point is that in order for any contract to be considered insurance, there must be a risk of loss.
Fortuitous Event - An occurrence largely beyond the control of any involved party; happening by chance; accidental; for example: fire, lightning, windstorm, explosion or flood.
Insurable Interest - In order to recover from a loss to property, the holder must have an insurable interest in the property at the time of the event or occurrence. An insurable interest is any right, title or interest in property where the holder of that right, title or interest sustains financial loss if the property is damaged or destroyed. Any lawful and substantial economic interest in the safety or preservation of the property from loss, destruction or damage also constitutes an insurable interest.
An entity does not have to be the property owner to have an insurable interest in it. Examples include, but are not limited to, mortgagees, trustees, vendors, lessees and bailees. Insurable interest for any entity must exist at the time the loss occurs.
Risk Of Loss - If property could never be destroyed, there is no risk of loss. If property must necessarily disintegrate or be destroyed, there is no risk of loss. Between these two extremes is the exposure of risk that can be insured.
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