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How Long Does a Surety Bond Last?
There are no surety bonds that last forever, but some can remain in force indefinitely. So, how long does a surety bond last? Some must be renewed annually, and some can’t be renewed at all. In other words, a surety bond lasts as long as the party requiring the purchase of the bond (the “obligee”) says it must last—as long as the premiums are paid, of course. Different types of surety bonds have different durations.
Why Does Duration Matter?
The financial protection a surety bond gives the obligee ends when the bond expires or is canceled. Unless there is an active surety bond in place at the time a loss is incurred, the obligee cannot file a claim to recover monetary damages.
Surety Bond Basics
It’s important to understand how surety bonds work to understand why “how long they last” is significant.
A surety bond is a legally binding contract among three parties: the obligee, the principal (the party required to purchase the bond), and the surety (the party that guarantees the bond). While the obligee sets the required bond amount (the bond’s “penal sum”) and is protected by the bond, the surety determines the appropriate premium rate based on an underwriting risk analysis. The protection for the obligee comes from the ability to file a claim for compensation if the principal’s violation of the terms of the surety bond causes financial harm to the obligee.
The principal is legally obligated to pay all valid claims the surety’s investigation finds. Risk enters the picture because in guaranteeing the bond, the surety agrees to lend the funds to the principal if necessary. In fact, the surety typically pays the claimant directly, on the principal’s behalf, which carries the risk of not being repaid by the principal. The surety can end up having to take legal action against the principal to recover the debt.
Examples of Bonds with Different Durations
Let’s consider some different kinds of surety bonds commonly required of construction companies—surety bonds with different length terms.
Contractor License Bonds
Many states require construction contractors to be licensed at the state level, and even in states that don’t, there may be local licensing requirements. In most cases, purchasing a contractor license bond is a mandatory step in the licensing process. The bond holds a licensed contractor accountable for operating in a lawful and ethical manner.
Most contractor licenses must be renewed annually. The bond expires at the same time as the license and must be renewed before the license can be renewed. Failing to maintain an active bond at all times can result in license suspension or revocation. In states requiring contractors to be licensed, working without a valid contractor license is illegal and can result in fines and penalties.
It’s common for project owners to require bid bonds from contractors competing for a contract. A bid bond is the contractor’s guarantee to accept the job chosen as the winning bidder. A bid bond also confirms that the bidder is willing and able to purchase a performance bond or any other required construction bond before the contract is awarded. If the winning bidder does not or cannot accept the job, the bid bond will pay the project owner the difference between that winning bid and the next lowest bid, up to the full amount of the bond.
A bid bond is good for a certain number of days (typically 120) after issuance. It must remain valid long enough for the project owner to choose a winning bidder and enter into a contract with them. If all of that can’t be accomplished within the term of the bid bond, the project owner, as the bond’s obligee, can request an extension from the surety.
Performance bonds protect project owners from monetary losses caused by a contractor’s default and failure to complete the work. When a performance bond is required as a condition of signing a contract, the project owner has a target date for project completion. However, many projects aren’t wrapped up by the original scheduled completion date. And larger projects may be measured in years rather than months.
The majority of performance bonds are issued and active until the project is completed, not requiring a formal renewal. Some performance bonds (more so on service contracts) are required to be renewed annually.
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