What type of policy must be in place for a contractor when required to secure a surety bond?

The type of policy that must be in place for a contractor when required to secure a surety bond is specifically known as Surety Bond Insurance. This form of insurance is critical in the bonding process, which acts as a guarantee that the contractor will fulfill their contractual obligations. A surety bond essentially serves as a three-party agreement involving the contractor (the principal), the party requiring the bond (the obligee), and the bond issuer (the surety).

When the contractor secures a surety bond, it assures the obligee—typically a property owner or government agency—that they will be compensated in the event that the contractor fails to complete the project as per the contractual agreement. This protects the obligee from potential financial loss if the contractor does not adhere to the specified terms.

The performance bond, while closely related and often forms part of the surety bond portfolio, is more centered on ensuring the completion of the project to the agreed standards. Therefore, surety bond insurance encompasses more than just performance aspects, also covering payment and compliance aspects of the contractor's obligations.

Having this specific type of coverage is essential, as it establishes a trust-based relationship among all parties involved in a construction project. It’s vital for contractors to understand the importance of sure