Surety bonds are issued as a commitment that assumes liability if another party fails or defaults on an obligation that they have made. A surety bond involves three parties who enter a contract based on the provisions within a surety bond agreement. They may be required by governmental entities, by owners of a specific project or to maintain compliance in certain occupations or business markets.
There are three distinct parties to these bond agreements. The principal is the party that must satisfy the bonding requirement. Without securing a surety bond, the principal would be unable to conduct business with an obligee. The obligee is the party that instituted the bonding requirement. This may be an individual, government entity or organization.
The surety company is the third party to the agreement that is assuming liability on behalf of the principal. Issuers of surety bonds in Arizona must have met the requirements specified by Arizona law.
Contract Surety Bonds
Surety bonds are broadly categorized as either contract or commercial bonds. A contract bond may be necessary for contractors that are seeking to obtain licensure or to become eligible to bid on specific construction projects. The bond serves as a safety measure if the contractor fails to satisfy an obligation.
A contract bond will allow for financial compensation for the project owner (principal) if the project is not completed or is not completed correctly based on the terms of the agreement. Financial compensation from these bonds also may be used to pay others involved, such as suppliers or subcontractors that were not compensated.
Commercial Surety Bonds
There are also many types of commercial surety bonds. Often they are a requirement from a governmental entity. Some of the more common commercial surety bonds include the following:
- Those conducting business in certain industries or working in some professions may need to secure license and permit bonds. Some of these bonds apply to freight or mortgage brokers, automobile dealers, and more.
- Judicial or court bonds may be required among parties involved in legal matters.
- Probate, trustee or fiduciary bonds may be legally required. These apply to someone assuming a fiduciary or “entrusted” role for the property or assets of others. This includes an administrator appointed to manage a family’s estate.
- Some public officials may require bonding. These include government officials that oversee important public assets. An example may include those managing the treasury.
- Miscellaneous bonds are simply those unable to be classified within other categories. They may be required by those who accrue fuel taxes or consume significant utility resources, and many more.
Who Issues Surety Bonds?
Surety bonds may be issued by an organization that specializes in these products or those who offer a variety of related products. Often sureties are issued by certain divisions of insurance companies or those operating in other financial product markets. In Arizona, these organizations must be licensed to do business by the Department of Insurance.
When issuing surety bonds, these organizations undertake a process that is similar to the underwriting process conducted by insurers. The issuer of the bond must make an assessment based on the potential risk involved. The issuer may review the buyer’s credit history, the base of assets, and other indicators related to financial stability.
Permit Bond Overview
Certain businesses are required by law to complete pre-licensing requirements. License and permit bonds are generally among the provisions that are necessary for legal operation. These bonds are part of the overall commitment that is made to adhere to laws and regulations required by federal, state, and local agencies. License and permit bonds also protect the customers of the business, which may include consumers and governmental entities.
License and permit bonds can be viewed as insurance the business pays for the protection of others. Those who honor their commitments and abide by the law rarely have any claims made against their bond. If a claim is made against the bond and paid by the surety company, the business is then responsible for repayment.
Why Might a Permit Be Required in Maricopa County?
One local agency that has permitting requirements is the Maricopa County Department of Transportation (MCDOT). They require that a permit be obtained for projects involving the roads, which generally require bonding. Examples include repairs or installations of sidewalks, curbs, and underground utility lines. In some cases, structural projects that involve “signs, mailboxes, fences, and landscaping” will require permits.
General Surety Bond Requirements in Maricopa County
Some of the general bonding provisions or conditions implemented by MCDOT include the following:
- Parties may not cancel a bond until related work is completed and approved by the County, thus “releasing” the bond
- The surety bond issuer may only be deemed liable up to the amount of the bond
- If a project is not completed within the specified time, the bond may need to be extended for a short period
- If the project is well behind the completion schedule, the principal may be deemed as in default and a claim against the bond may occur
- If a claim is made, the issuer of the bond may reach a monetary settlement agreement or have another contractor complete the work according to the original provisions
- In some instances, there may be some unforeseen changes required to complete the work. A new bond is not required or additional “add-on” bond coverage is only necessary when the cost of the changes exceeds 20%.
Right-of-Way Permit Bonds in Maricopa County
MCDOT will always require bonds unless the work is being conducted by a public entity with a net worth that exceeds $1 million. For very small projects requiring temporary access a nominal $2,500 bond is sufficient.
Bond Requirements for Oversize or Overweight Permit in Maricopa County
In the interest of public safety, a special permit and bond may be required to move oversized or overweight loads on the roads in Maricopa County. Often these moving projects are required to be completed at night and a bond of at least $10,000 must be secured.
Arizona Agency Provides Permit Bonds
The Gebhardt Insurance Group is an established independent agency that offers a truly comprehensive group of products. Examples include insurance that protects homes, vehicles, and businesses and a variety of surety bonds. We look forward to speaking with you and encourage you to contact us at (520) 836-3244.
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