A surety bond is an agreement between three parties: a principal, an obligee and a surety company, each of which serves a critical role in making the arrangement a workable one. The principal is a contractor, and is the individual or company seeking to purchase the bond because of a requirement imposed by an obligee. The obligee is another individual or company (often a government agency) that hires the principal to perform some kind of task, but wishes to protect itself against malpractice, fraud, poor performance or job abandonment.
The surety company acts something like an insurance company in this model, selling a bond to the principal, and formally identifying the conditions of performance required by the obligee in the bond document itself. Every bond has a face value, which is the maximum amount of money that would be paid out by the surety company in the event of a claim made by the obligee when performance criteria are not met. The obligee has the option to make a claim for any amount up to that limit, but would of course have to justify the amount of any claim made.
A bond works in a manner similar to insurance in that it serves as a risk transfer mechanism. The obligee in a bond arrangement does not wish to assume all the risk when hiring someone to do a job, and therefore transfers a portion of that risk to the surety company. The surety is obliged to pay out any claim made against the bond, in the amount specified and justified by the obligee, although subsequently the surety would pursue the principal to recover the entire amount of the claim which it paid out.
The principal, therefore, is motivated to live up to the specified terms of the agreement, because they must purchase the bond in the first place, and if any terms of the bond are not fulfilled and a claim is made, the principal would also be responsible for reimbursing the bonding company. As you can see, there is a certain balance to this model, with each of the three parties benefiting when a job is satisfactorily completed, and each of the three suffering some kind of setback if the reverse were to be true.
There are two basic categories of bonds: commercial bonds and contract (or construction) bonds. Within each of these broad categories, there are several sub-categories, and altogether they include hundreds of different types of bonds available for purchase, both in New Mexico and other states of the country. The construction bond category has far fewer sub-types, consisting primarily of bid bonds, supply payment bonds, performance bonds, site improvement bonds, bid bonds, maintenance bonds and subdivision bonds.
The commercial bond category on the other hand, consists of far more types than can be listed easily. The main types of commercial bonds are fiduciary bonds, court bonds, DMEPOS bonds, fidelity bonds, public official bonds and professional license bonds. Each of these works in the same general way described above, i.e. they serve as a guarantee of performance or compliance with regulations imposed upon the principal who purchases the bond.
Two of the biggest categories of industry requiring bonds as a condition of hire or employment are the construction business and government agencies. On any large construction project, there will always be a number of contractors contributing their efforts to the overall body of work. It would be easy to imagine the chaos which would result if contractors involved on a construction project were not held to any standard of performance - the likelihood of a project being completed satisfactorily, and on time and budget, would be low.
Government organizations have an obligation to protect taxpayers' money, since that is the normal funding source for all government activities and procedures. The best way to protect taxpayers during government building projects is to require that all contractors be bonded and to stipulate performance expectations as terms of the bond.
There are of course, thousands of other industries that also require the usage of bonds, and for the same reasons as the government and the construction industry, but more bonds are written for construction applications and for government contracting than any other sector.
The surety bonding company to contact if you need a bond is NFP, where you can expect the best rates on bond purchasing, as well as fast processing and superior customer service throughout the process. Obtaining a bond in general is a fairly simple process, assuming you haven't had bond claims made against you in the past.
After figuring out exactly which type of bond you need, you can apply online with us for your bond. If you're unsure of which bond is appropriate for your situation, reach out and we can help you. When your application is received, an indemnity agreement will be drawn up, which specifies the terms of performance as well as the bond amount. When you receive this agreement, it must be signed, notarized and returned to the surety bonding company, after which the bond itself can be issued.
Our team provides affordable surety and fidelity bond insurance. Every bond is prepared on a specific New Mexico bond form, as prescribed by the entity requiring the bonding (known as the obligee). Below is a list of commonly requested bond types in New Mexico. Apply for your New Mexico surety bond now by completing our online application.