Surety Bond Professionals is a family owned and operated bonding agency with over 30 years of experience. With access to a broad range of surety markets, our expert agents are ready to assist with all of your construction bond needs.
What Are They?
A Florida maintenance bond is a contractor’s guarantee to correct construction defects that don’t surface immediately or compensate the project owner for the cost of having repairs made by someone else. The guarantee is good for the term of the bond, which typically is between 12 and 24 months from the date a project is completed. If a defect that can be attributed to the contractor is discovered during that time, the project owner can file a claim against the Florida maintenance bond furnished by the contractor.
Who Needs Them?
The project owner decides whether or not to require a maintenance bond. They’re often required for state-funded public works projects and increasingly by private project owners. The project owner establishes the required bond amount and the term of the bond.
How Do They Work?
A Florida maintenance bond is a legally binding contract among three parties known in the language of surety bonds as the:
- Obligee—the project owner requiring the bond,
- Principal—the contractor purchasing the bond, and the
- Surety—the bond’s guarantor.
Although maintenance bonds have some characteristics in common with insurance, they are not insurance. People and businesses purchase insurance for their own financial protection. Contractors purchase maintenance bonds for the financial protection of the obligee, not their own.
While the principal purchasing a maintenance bond is legally obligated to pay all valid claims against the bond, that can be difficult for contractors, who typically aren’t sitting on a pile of uncommitted cash. As the bond’s guarantor, the surety agrees to extend credit to the principal for the purpose of paying claims.
So, while the principal is legally obligated to pay all valid claims, in practice, the surety pays the claim initially on behalf of the principal. In doing so, the surety essentially is lending the principal the funds to be repaid within a certain period of time. Not repaying the surety as agreed upon can subject the principal to legal action taken by the surety to recover the debt.
What Do They Cost?
The annual premium for a Florida maintenance bond is the product of multiplying two factors: the penal sum established by the obligee and the premium rate set by the surety on a case-by-case basis. These bonds are subject to underwriting to determine the appropriate premium rate. The main underwriting concern is the risk of the principal not repaying the surety for claims the surety has paid on the principal’s behalf.
Low-risk results in a low premium rate, while higher risk leads to the principal being assigned a higher premium rate. The risk level is determined based largely on the principal’s personal credit score.
A well-qualified principal typically will be assigned a premium rate in the range of one to three percent.
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