A Look at the Functions of a NJ Surety Bond

New Jersey requires license and permit bonds for many different lines of work. Because a NJ surety bond ensures the completion of the project in the event of contractor default, a project owner (a.k.a. an obligee) seeks a qualified contractor (a.k.a. principal) to fulfill a contract.

The bond, unlike insurance policies that are typically drafted by the insurer, is usually chosen by the obligee. In the case of a public project, the bond is often prescribed by, or designed to meet the requirements of a statute or any applicable administrative regulations.

In this case, the provisions of the typical surety bond favor the obligee and it’s unusual for sureties to have the opportunity to negotiate the terms of a contract surety bond (either the bond is issued by the surety in the form presented by the obligee or the underwriters may decline issuance).

3 bonds typically in use by contractors and other professionals

Perhaps the most common bond forms in use today are bid bonds, performance bonds and payment bonds. An association of architects generally crafts these types of bonds with the interests of the owners who retain their services in mind. Therefore, an obligee may find cause to modify these bond forms in order to further expand the surety’s liability or restrict any recourse by the surety to traditional common law defenses.

An obligee, due to the occurrence of a recent bad experience, may change or redesign a bond to include a certain element of damage. For example, an obligee may seek to alter a NJ surety bond to enlarge the surety’s liability or restrict its ability to mitigate its losses in the following ways:

  • Require the surety to perform the bonded contract upon assertion of a claim and thereafter litigate the propriety of the termination
  • Enlarge the obligations of the surety beyond the commitment to arrange and/or pay the net additional cost for performance of the balance of the contract work
  • Vary the burden of proof applicable to its claim
  • Preclude the surety from utilizing its defaulted principal in the performance of the contract, or
  • Shorten the time frame within which the surety may assert any defenses

These are just a few examples of how bonds and performance of contractors are regulated. Speak to an experienced insurer about any questions or concerns.