Bond and Insurance Types

Owner, Contractor, Architect

Definitions:
Principal

The party who has the primary obligation to perform the undertaking
that is being bonded. For example, the contractor on a bonded
construction project is the principal. Pays a premium to the surety for
providing the performance and payment bond. The premium is based
in the contract being bonded and its usually between 0.3% - 2%
(depending on risk etc)

Surety

Also referred to as the bonding company, the surety is the party that
guarantees the principals performance. In essence, the surety agrees
to be bound to the obligations of the principal should the principal fail
to perform them.

Obligee

The obligee is the person for whose benefit the bond is written. With
respect to a performance bond, the obligee is usually the owner. Some
performance bonds are written in favor of more than one oblige (e.g., a
subcontractors bond maybe written for the benefit of both owner and
contractor, or a contractors bond for the benefit of the owner and the
project lender). Such bonds are called dual obligee bonds.

Surety bond
The surety bond is the written document given by the surety and
principal to the obligee to guarantee a specific obligation.
Indemnity Agreement An agreement between the principal and the surety
whereby the principal guarantees the surety that the surety will incur
no loss by reason of its providing the bond.
Penal amount
Bonds are written with a limit on the amount of the guarantee.
This limiting amount, frequently 100% of the contract amount, is called
the penal sum or penal amount of the bond.
Claimant

Commonly used to refer to a party who files a claim against the bond.
This could be the owner or a subcontractor or supplier seeking
recovery under the payment bond.

Lien

The legal right of a party, such as a subcontractor, to claim a security

interest in the project or have it sold for payment of a claim.

Labor and Material Payment Bond (Payment Bond)

Who:
What/Why:

Provided by contractor
Protects owner against claims by subcontractors and suppliers who
have not been paid by contractor. Obtained from a bond company
called a surety. The surety guarantees that the project will be turned
over free of mechanics liens and that subcontractors and materials
suppliers will be paid promptly in case the contractor fails to pay them.

When:

Protects the owner against mechanics liens and additional delays

caused by unpaid subcontractors and suppliers. Usually provides
payment to those directly employed as well as sub or sub-sub
contractors. Usually requires remote claimants to give contractor
written notice that they are unpaid within 90 days (to protect
contractor).
When the job is awarded to the winning bid, a payment and
performance bond will then be required as a security to the job
completion.

Bid Bond
Who:
What:

When:

Provided by bidder
Guarantees the bidder will enter into a contract with the owner at the
price and on the terms stated on the bid and will provide the necessary
performance and labor material payment bonds. Protects the owners
out of pocket expenses incurred if the contractor fails to enter into an
agreement after the bid is awarded (or during the bidding phase if the
contractor drops out and is at fault for it). Bid bonds are generally costeffective for the owner, as most bonding companies do not charge
separately for the bid bond if a performance bond and a payment bond
are also required.
At the time of bid (submitted with bid)

Performance Bond
Who:
What:

When:

Provided by contractor. Usually at the cost to an owner.

Guarantees the performance of the work. In the event of the
contractors default, it protects the owner against loss up to the penal
amount of the bond. This guarantees that the surety will perform and
complete the construction contract up to the bond amount or provide
sufficient funds (up to the penal amount) to complete the project.
Restrictions apply, For example, if the owner pays the contractor more
than is owed under the contract or materially increases the scope of
the contract without the suretys consent, the surety can claim a
discharge to the extent it is prejudiced.
Must be delivered to the owner prior to the commencement of the
work.

All-Risk Insurance
What:

A type of property Insurance providing broad coverage.

Property Insurance
Workers Compensation Insurance
Loss of Use Insurance
What:

Protects the owner in case of los of use due to fire or other hazards

References:
The Project Resource ManualCSI Manual of Practice - Section 5.19