Page 260 - Urban Construction Project Management

Insurance and Bonds 215
Obligee

This is the entity that is protected by and most directly benefits from a surety bond,
either the owner or the CM/GC. Governmental entities are required by the Miller Act
(federal law) and little Miller Acts (state laws) to have surety bonds to guarantee that
taxpayer monies are being used prudently. It could also be, for example, a mechanical
subcontractor who is responsible for the sheet metal portion of a job and decides to
require a bond from the sheet metal sub-subcontractor who will be supplying and
installing the ductwork correctly and for the specified contract amount.

Surety Company
This is typically the surety division/department of an insurance/bonding company. It
receives a fee from the principal (subcontractor) for putting its money at risk and for
guaranteeing to the obligee (owner or CM/GC) that the principal will perform per the
contract requirements, including paying those who have provided labor and material to
the project.

Most surety companies sell their bonds through independent insurance agents. Some
agents are bond specialists. These agents will be able to give the CM/GC and subcon-
tractor good advice on what the surety companies require to provide a bond. They will
also have good relationships with surety underwriters in order to know which surety
company would be best for the particular subcontractor. A CM/GC typically has one
surety agent and one surety company with whom they deal to write all of their bonds.
A surety company considers the relationship between the company and the contractor
to be very important.

It is important for CM/GCs and subcontractors to know that unlike companies that
write insurance policies, bonding companies that write surety bonds have the legal right
to go back against any CM/GC or subcontractor who causes them a loss on a surety
bond and recover the total amount of the loss and the surety’s associated expenses.
Surety companies sometimes require that the CM/GC and the subcontractor provide
collateral for the value of the surety bond. Sometimes, however, the bonding company
will be comfortable with the financial status, experience, reputation, and performance
of the CM/GC and write the bond based on their relationship with the CM/GC. The
CM/GC and subcontractors will have to sign an indemnity agreement specifically
agreeing to this before the surety company will write the bond. Often, the surety com-
pany will require the owners of the CM/GC and subcontractors, along with their
spouses, to sign personally for the indemnity agreement. Therefore, if the subcontrac-
tor causes the surety company a loss, not only would the subcontractor be liable to pay
the surety back, but the owners would be responsible as well. However, surety compa-
nies are not secured creditors. At any one time, they probably have many millions of
dollars of bonds written for projects that are not completed. If they were to file the
indemnity agreement for the contracts they are guaranteeing, the contractors would
have a very difficult time getting a bank to loan them money.

CM/GC and subcontractors usually need a few license bonds that are required by various
governmental agencies in order to qualify a CM/GC and subcontractor for licensing in a