October 15th, 2020

Residential Repairs from Hurricane or Flood Damage Might Need a Surety Bond

The 2020 hurricane season is underway and insurance companies and their agents are preparing for the ensuing damage and the insurance ramifications. In the aftermath, construction companies will play an important role in the repair of damaged buildings, many of which will be guaranteed by surety bonds known as performance bonds. Typically, performance bonds are only utilized on government or commercial buildings, but insurance companies paying claims on damaged residential properties have begun requiring contractors to be bonded for the repairs. This article examines this lesser-known requirement and how to best service customers who need help with the surety bond.

What Type of Bond is Needed?

When insurance companies cover the cost of home repairs, they will most likely require the contractor performing the repairs to be properly insured, licensed and “bonded.” If the contractor is licensed and bonded within their state or municipality, the license bond should be sufficient to meet the insurance companies requirements. However, some states and municipalities do not require a contractor’s license and/or surety bond for contractors. In this scenario, contractors may need to obtain a Residential Performance Bond for the project to meet the insurance company requirements.

Residential Performance Bonds provide financial compensation to the homeowner (and in this case the insurance company) if the contractor fails to complete the project. For more information on contract bonds, be sure to check out our previous blog post.

Why Do Insurance Companies Require a Residential Performance Bond?

Flood or wind damage insurers are responsible for paying the homeowner for the cost to repair the damaged home. To properly evaluate the homeowners costs, carriers will want to review the repair contract and the contractor’s qualifications to ensure their estimate is appropriate. Including a Residential Performance Bond requirement ensures the homeowner doesn’t suffer financial harm if the contractor fails to complete the project.

While insurance companies cannot directly require a contractor to obtain a Residential Performance Bond since the contract to perform the repairs is between the contractor and the homeowner, they can require the homeowner to hire a bonded contractor as a prerequisite to paying for the repairs.

Why is a Residential Performance Bond Difficult to Obtain?

Contractors may have difficulty obtaining a Residential Performance Bond because most surety companies are unwilling to write contract bonds for non-government or commercial project owners. Performance bonds are typically written to guarantee government projects or private commercial projects that have sophisticated parties to the contract and utilize standardized contract language and procedures.

Residential projects come in many different shapes and sizes, with project owners that may be completely unfamiliar with construction contract terms. To put it simply, surety companies prefer the known risks of government or commercial projects, to the unknown risks of residential projects.

How Much Does a Residential Performance Bond Cost?

Residential Performance Bonds typically cost 4% of the total contract amount. For example, if the contract amount is $100,000, then the premium will total $4,000. If the cost of the project increases from the original cost estimate, then the bond amount will increase and the contractor will have to pay additional premium. If the total cost of the project decreases, then the bond amount will be reduced and the contractor will be refunded the excess premium. Some contractors may need to deposit collateral with the surety company if their experience or financial situation is not sufficient.

What are the Underwriting Requirements for a Residential Performance Bond?

As previously mentioned, residential performance bonds can be difficult to get. Underwriters will examine the following factors when determining whether or not a contractor qualifies for a Residential Performance Bond:

• Personal Credit – Underwriters will review the contractor’s personal credit score. Most surety companies will require a good credit score with few or no derogatory items on the report.
• Contract Details – The size and scope of the contract will help determine the risk of the bond. Hazardous scopes of work (i.e. asbestos removal, mold remediation, etc), longer than normal warranty periods, and damages for delay are some examples of contract conditions that may cause an underwriter to decline the bond.
• Experience/Years in Business – Underwriters will view contractors who have been in business for multiple years as less risky than new contractors.
• Work History – Contractors who have successfully completed projects of similar size and scope in the past are more likely to be approved.
• Project Timeframe – Projects lasting longer than 1 year will generally be declined without a proper explanation.
• Financial Statements – For projects that exceed $100,000, underwriters will review a current balance sheet and profit & loss statement for the contractor to ensure the contractor is profitable and has the appropriate working capital on hand.

How Can Insurance Agents Help Their Customers with the Bond?

BondExchange makes obtaining a Residential Performance Bond easy. Simply login to your account and use our keyword search to find the “performance” bond in our database. Don’t have a login? Enroll now and let us help you satisfy your customers’ needs. If you have questions, give us a call at (800) 438-1162 and we’ll walk you through it.