Regardless of the type of surety bond you need to post, or whether you are a business or an individual, it’s important to understand this key concept.
Some people think the penal sum of the bond is the same as the cost of getting bonded, but this is incorrect. Sometimes called the “total bond amount,” a bond’s penal sum refers to the maximum compensation a surety bond provides in cases where the bonded entity doesn’t meet its contractual obligations towards someone else.
Similarly to insurance policy limits, no claims can be made in sums exceeding the maximum penal sum of the bond.
The obligee, i.e. the entity which requires the surety bond, determines what the penal sum of the bond will be. The type of surety bond you need also influences the penal sum.
For contract bonds, usually required for work on large construction projects, the penal sum is most often a certain percentage of the total amount of the contract. For bid bonds, for example, it is usually 10-20%.
However, the penal sum of bonds required on federal projects can be much higher. For performance bonds it’s the same as the contract price. For payment bonds, it is 40%-50% of the contract price.
License and Permit Bonds
For license and permit bonds, required from many businesses applying for a license, the amounts are usually pre-determined. They are based on an estimate of what sum would be sufficient to cover the cost of potential claims.
There have been many instances where the penal sum of the bond is raised because the volume of claims for a particular bond type is rising, so the initial sum no longer provides adequate compensation to claimants. Conversely, if an industry is experiencing a negligible number of claims, the penal sum of the bond may be lowered to reduce the burden on businesses.
To make the penal sum of bond easier to understand, let’s say you’ve posted a $50,000 surety bond. This means that if there is a valid claim against you, the surety bonds company that underwrote your bond is liable to pay for losses up to $50,000.
That does not mean, however, that each bond claim will cost you $50,000. After an investigation into the claim, the court will make an estimate of the adequate penalty. If it’s deemed to be $5,000, for example, this means that there is now $45,000 left to cover other claimants. Claims can be made until the maximum penal sum of the bond is exhausted.
Learn more about surety bond claims and why you should always do your best to avoid them.
Still have questions about your total bond amount and what it means? Don’t hesitate to call us at (877)-514-5146.