A payment bond is usually obtained by a contractor or sub-contractor on a construction job to guarantee timely payment for labor and materials. Also known as a surety bond, a payment bond is provided by a bond-writing service that agrees to take responsibility for the claim if the bond holder fails to pay what he or she owes. If you are considering getting a Payment Bond in Phoenix, the following information may be helpful.
First of all, a payment bond is an agreement among three parties: the obligee, the principal, and the surety. The obligee is the person or group to whom the bond is payable, for example, a construction rental company or materials supplier. The principal is the contractor who applies for and obtains the bond in order to guarantee payment. The surety is the bond-writing service that backs the principal’s guarantee.
While a payment bond can be seen as a form of risk management, it is not the same thing as insurance. While insurance protects the policy-holder in the case of a loss of some kind, a payment bond protects the person or company that the bond-holder has promised to pay. If the surety has to pay a claim against the principal, the principal will still owe the money to the surety company.
A payment bond can be better compared to a line of credit. When the principal applies for a bond, his or her credit score will likely be taken into account to determine the amount of money the surety company can guarantee. In addition to a credit score, the surety company may ask for other financial information such as tax returns and bank statements. The principal will be asked to sign an indemnity agreement promising to repay the surety company for any claim that the company pays on his or her behalf.
If a claim is made against the principal, the surety company will first investigate the claim to make sure it is legitimate. If so, the company will pay the claim, and then request repayment from the principal. Browse our website to learn more about getting a payment bond in Phoenix.
