How Warranty Periods Can Impact Bonding

Author, Andy Roberts, Account Executive, Surety, Rancho Mesa Insurance Services, Inc.

When we review contracts that require bonding, one area that we need to understand is the warranty obligation. I would expect that over 90% of the contracts that we review for our contractor clients contain a standard one-year warranty term. Since Performance & Payment Bonds respond to the contract, the surety company is also on the hook for this one-year obligation. Premium rates for bonding already include the cost for this one-year warranty in the cost of the performance & payment bond.

 Hand signing a contract with a pen.

What if the warranty period exceeds 12 months?

Depending on the warranty wording of the contract, both the contractor and the surety company can be liable for multiple years of warranty obligation. Anytime that the warranty is going to exceed one year, the surety will charge additional rate for each extra year, which increases the cost of the bond, thereby increasing costs for the principle and ultimately the obligee or owner. Second, and most importantly, increased warranty periods could make it more difficult for a contractor to qualify for a bond for that specific job. The longer the warranty period that the bond will be covering, the longer the surety has to try and project how a contractor or company will be doing at that time. Since they have no real way of doing this, it increases their liability for that particular job and could ultimately lead to a declination for the bond.

One option to consider - for a warranty period of longer than one year (but not specifically stated if the bond will respond to the longer warranty period), the contractor should ask for clarification from the obligee for a couple of different reasons. The owner may confirm that the bond does not have to cover the warranty after the initial one-year period. This will make it easier for the contractor to obtain the bond, because the surety will not be required to respond to a warranty claim several years after a job has been completed. It should be noted that this does not mean the contractor is not bound by the full warranty length stated in the contract

If your company is interested in working on jobs that require bonding, or you are a contractor with an established surety program but have questions about warranty periods, please contact me at Rancho Mesa Insurance Services 619-937-0164 as I can assist with any questions you may have.