What is a Surety Bond in Alabama?
To put it simply, surety bonds are a guarantee that an asset will be provided to fulfill requirements of a contract. They are not insurance policies, but rather asset guarantees that the principal has the required assets to fulfill their obligations. Most sureties require a personal guarantee from the owner of the business.
If that individual owns 51% (or more) or is an officer of the business, it can be very beneficial to have all required assets personally guaranteed, including homes and cash reserves. The surety generally does not review financial statements other than what is submitted for the bond application. Therefore, having the ability to personally guarantee all financial matters can have a big impact on the bond.
When it comes to licensing in Alabama, surety bonds are applicable to several types of businesses. Alabama requires some degree of bonding for anyone pursuing the following licenses:
Contractor licenses: Commercial, general contractors, electrical, plumbing, flooring, roofing, swimming pool, HVAC, and pest control contractors are just a few of the examples of contractors who require bonds.
Business location licenses: A $5000 bond is required to open a location in the state of Alabama.
Consumer finance license: Anyone providing loans to consumers must be licensed and bonded.
Debt management license: Anyone offering debt settlement or debt repair is required to be licensed and bonded .
Insurance licensing: Several types of professionals in the insurance field, including agents, brokers, service, solicitors, and others, are required to be licensed and bonded to conduct business.
Private investigator licensing: People seeking to work in private investigation or security are required to carry a license and bond.
Surety bonds are requited to ensure that the business or individual will act according to a specific standard associated with that work. These requirements safeguard the communities that rely on these services and protect Alabama from unqualified individuals.
For each category of licensee, there are state standards that must be adhered to. If those standards are not lived up to, the surety bond will safeguard clients by providing the option to submit a claim. This process is overseen and managed by the surety company and protects Alabama from unscrupulous individuals taking advantage of its citizens.
Ensuring proper licensing and bonding helps consumers in Alabama know who they can trust to conduct business within the state. These same safeguards help to keep erroneous, irresponsible, and potentially harmful individuals off the street. Surety bonds protect Alabama consumers and victims of fraud when they fall victim to an unlicensed or negligent contractor or individual.
Types of Alabama Surety Bonds
Alabama surety bonds are required for a wide array of reasons. Contractors, for example, must obtain contractor license bonds to lawfully perform work in the state. These license bonds are often considered the most common type of surety bond in the construction industry, and they can be required at the local, county, or state level.
Still, lots of other bonds are issued all the time in Alabama and requested by both public and private parties. In fact, surety bonds can be required for business licenses, tax compliance, court proceedings, and a whole host of other matters. As such, the types of surety bonds that are often seen in Alabama surety bond claims are:
License and permit bonds hold up an applicant’s business as a specific type of entity. Contractors, for instance, are licensed as a certain type of business organization, and license bonds require them to perform according to the law as that business type. If the business does not, a claim could be paid to the injured party.
When a contractor uses a contract surety bond, funds sit in escrow that help trumpet the completion of work. The contractor and their bonding company can determine how to allocate those funds for the project by way of the surety bond. In most cases, contract bonds are used only for larger construction projects.
One of the most tendered types of Alabama surety bonds, court bonds are required in a myriad of capacities. These bonds hold up the principles and obligations of both the plaintiff and the defendant in a wide range of legal actions. So, for instance, a surety bond might be required of someone who wishes to open an estate when assets are available for distribution.
Like court bonds, a probate bond is a protective device for beneficiaries. Probate bonds are required for the execution of a will when there are disputes over its validity. They can also be required of the administrator of an estate if the beneficiaries do not (or cannot) agree on a fiduciary.
Alabama Statutory Surety Bond Requirements
Certain legalities govern the use of surety bonds in Alabama, as is true in all states. From licensing and bonding to the enforcement of those bonds, the law clearly defines the scope of a surety bond. Unfortunately, many confuse the requirements of an Alabama contractor’s license bond and a surety bond.
A state’s licensing and bonding requirements for certain professions and contractors are frequently set forth in its code of regulations. This is certainly the case for Alabama. In the Code of Alabama, Title 34, Chapter 8—General Contractors—is where you will find most, if not all, of the legal references for the licensing and bonding requirements for general and special contractors. However, the Alabama Department of Revenue is responsible for recording the surety bonds filed by contractors with the Office of the Secretary of State.
The purpose of the §34-8 surety bonds is twofold: first, it ensures the contractor adheres to the licensing laws and regulations; second, it offers protection in the event a contractor should fail to complete a home improvement project. Although the contractor considers the surety bond to be a cost of doing business, the consumer needs to understand the value of this document. The surety bond is not an insurance policy, however, it may at times function as one.
Unfortunately, many in the legal profession are not familiar with surety bonds. Many refer to the contractor’s surety bond as an insurance bond whereas surety bonds are not insurance. As a result, many business owners, homeowners and other consumers have been known to confuse surety bonds with insurance policies, especially when in the presence of an unscrupulous contractor. It is very important to understand the difference between the two and to demand an insurance certificate if a contractor says that his or her surety bond is similar to insurance. They are not alike and one is not a substitute for the other.
It remains unclear why the Alabama Legislature requires general contractors and special trade contractors to file a surety bond with the Secretary of State. Surely it is not simply because other states require it. I think that somewhere along the way, some legislative lawyer wrote in that there shall be a surety bond in place before contracting down the street in favor of some other ad hoc piece of legislation.
The main purpose of a surety bond is for the protection of the consumer. The reasoning behind this statute is because if a homeowner hires a contractor and the contractor fails to repair a defect in their work, there is recourse for that homeowner. Surety bonds for contractors are beneficial to the citizens of Alabama, in the long run, because homeowners are able to repair the damage, utilizing the surety company for funds to make those repairs.
It is important to note that bonds are not an insurance policy, as stated numerous times above. The surety company is not providing financial security to the contractor, the contractor is the one requesting the surety bond. Generally, consumers might believe that a contractor’s failure to comply with certain laws would prevent them from getting a surety bond. This is not the case. A contractor still can afford a surety company’s premium and meet all of the requirements to have the surety company’s name on the surety bond.
How to Get an Alabama Surety Bond
The process of obtaining a surety bond in Alabama typically begins with an application through a surety provider. The application will include questions about the applicant’s financial history, industry experience and any relevant certificates or licenses. It may also require fingerprints and a criminal background check for certain types of bonds.
The surety provider will complete a background check and evaluate the application based on the proposed bond amount, to determine whether the applicant is a good candidate for bonding. The amount of the premium generally corresponds with the level of risk involved, since the purpose of the surety is to protect the obligee from default, bankruptcy or other loss of obligations. Once the surety provider has reviewed the application and determined eligibility , the applicant must sign the surety contract and pay the bond premium.
The bonding premium is typically expressed as a percentage of the bond amount. For example, if the bond amount is $25,000 and the premium rate is 3 percent, the bond premium will equal $750. Surety bond rates vary from provider to provider, but in most cases vary between 1 and 5 percent, depending on the type of bond, the obligations of the principal and the level of risk involved.
Once the agreement is finalized, the surety provider will issue the requested bond.
Although the process of obtaining surety bonds can be somewhat tedious and time-consuming, it is critical for any applicant who requires licensing, permitting or certification related to their occupation. It is also necessary for those who plan to engage in a contract that requires one. It is often easiest to start early, allowing applicants plenty of time to review the many requirements involved in the bonding process.
Alabama Surety Bond FAQs
Like much in life, surety bonds are not fully understood by everybody. The following are a few of the common questions we receive about Alabama surety bonds:
How long does it take to get a bond for my Alabama business?
To make sure you have your bond in time, it’s best to get started as soon as possible. If you choose the "easy-peasy" route with an online bond website and don’t mind paying a high price or waiting a few days to receive it, you will likely get your license bond fairly quickly. If you’re looking for an easier, more professional way, local surety bond agents will walk you through the entire process. Once all documents are filled out and submitted, as long as you’re approved, your Alabama surety bond will arrive via e-mail in less than twenty-four hours.
How do I claim against an Alabama surety bond?
Claiming against a surety bond isn’t quite as simple as filing a claim against your car insurance policy or even a warranty for a product you purchased. A bond is not an insurance policy and the procedures are different. At first, the surety company will conduct an investigation. After that concludes, then they will distribute payment depending upon the bond type. As a bonded individual you won’t face penalties, but your surety company will be searching to recoup its losses. If it’s discovered that you did act irresponsibly, you may have to pay them back.
What happens if my Alabama surety bond is cancelled?
Bond cancellation is a bit more complicated than cancelling your auto insurance policy. The surety company must notify the Principal 30 days before they issue a cancellation notice. Once the Principal gets that notice, they have 30 days to get a new bond. If they don’t secure a new bond then their license, permit, or contract will be cancelled.
Compliance and Penalties for Alabama Surety Bonds
The importance of maintaining compliance with surety bond requirements cannot be overstated. Failure to comply with Alabama’s surety bond regulations can have significant legal and business consequences for parties to the contract. A surety bond is essentially a three party agreement. The bonding company agrees that it will secure the performance of the contractor under the contract. In return, the contractor agrees to complete the contract. The surety company has a right of action against the contractor if it has to complete the contract and its obligation to secure a contract bond is triggered . Further, the owner has the rights to pursue the principal contractor for completion costs of a contract if the contractor defaults.
Surety provisions of well drafted contracts are intended to protect all parties to the contract from losses due to the default of the principal. Failure to comply with these surety provisions can result in the owner looking to its contractors and sureties to recover for any contracts that the owner is forced to complete as a result of the contractor’s default and something that can impact all businesses involved in the contract suffering considerable loss.