OVERVIEW OF BID BONDS, By Jacob Dines of Surety1
Bid Bonds – Issued by surety on behalf of contractor, as principal, as security for a bid to provide goods or services to the obligee. A bid bond is a type of surety bond that guarantees that the principal will enter into the contract that is being bid.
BID BOND CLAIMS
A claim on a bid bond will arise under two circumstances:
- The principal refuses to enter into the contract after determining that the contract will not be profitable due an error made in the bidding process.
- After the principal is awarded the bid, the surety may decline the issuance of the performance bond due to underwriting criteria not being met.
An honest mistake is usually a valid reason for a bidder to withdraw the bid without penalty. It is common for the surety company to raise a defense on behalf of the principal to avoid paying the claim on a bond. The surety market’s rights and obligations are a derivate of its principal’s and therefore will often raise its own policy defenses that are not available to the principal. One notable policy defense is waiver because of a delay in presenting the claim thus resulting inan expiration in either the bond or the bid.
HOW A VALID BID BOND CLAIM IS PROCESSED
The amount paid by the surety is constituted by the difference between the principal’s bid and the next highest bidder. Here is a good example of such claim:
- Principal submits a bid for $50,000 then later revokes the offer.
- The next highest bidder has submitted a bid for $60,000.
- Obligee makes a claim on the original bidder’s surety bond for $10,000.
- $10,000 = $60,000 – $50,000
- Difference = Next highest bid – Original bid.
There are some exceptions to the above rule depending on the terms of the bond. The maximum liability will be the penal limit stated in the language on the bond.