Surety Bond Misconceptions Part 3
In the final installment of this three-part article, we will wrap up our discussion about common surety bond misconceptions in the construction industry. As construction lawyers in Orlando, we know that construction bids are often avoided when a contractor sees that a surety bond is attached to the project.To view the first and second installments in this article, please visit Part 1 and Part 2.
Other Insurance Products Can Replace A Surety Bond
One misconception is that other insurance products can replace a surety bond. It is not true that a letter of credit or Subcontractor Default Insurance (SDI) can be used in place of surety bonds. No other product gives the same level of complete protection as surety bonds do.
Letter of Credit
A letter of credit anchors a part of the contract amount in cash in case the contractor defaults. However, with a letter of credit there is no examination of whether the contract is being closely and fully completed, which sureties do provide.
Subcontractor Default Insurance (SDI)
SDI is also not an equal option to surety bonds. It’s more likeregular insurance because the insured entity is the contractor and not the owner of the project or the subcontractors and suppliers, who are most affected in cases of default or bankruptcy. SDI is not considered ideal for contractors themselves, because they have to cover all losses at first, and then get reimbursedfrom the insurance. This will put their finances in jeopardy and could make them unable to repay all due costs to other affected parties.
Surety Companies Never See Losses
Some contractors may assume that surety companies don’t pay for anything, because the contractors have to cover the bill at the end. However, this isn’t always true. In the case of bankruptcies and pending claims, there is nobody else but the surety provider to protect the costs. There are also extra hidden costs that surety companies additionally cover. Sometimes they will finance contractors through hard times, especially if they have a steady, long-term relationship. In case of conflicts, they can also help with negotiations which will save money for contractors.
Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.