When a contractor works on private property that might continue onto public property owned by the city, county, state, or federal government, the contractor must be bonded with an Encroachment Bond.
The three parties of this bond include the obligee, the principal, and the surety company. The obligee is the municipally that is requiring the principal to be bonded. The contractor (principal) must be bonded in order to legally work on private property that spreads onto public property. The surety company is the party that underwrites and ensures the bond.
What Is This Bond For, and What Does It Do?
The surety bond is an agreement between the three parties that the principal will act accordingly to what is stated in the bond. If the contractor acts fraudulently or fails to abide by the bond requirements, then the surety company will cover the claim filed against the bond.
Private property the contractor works on which may “encroach” onto public property must be covered by a surety bond. The bond will cover any material damages or alterations to a public property by the hands of a contractor. With the bond, the contractor is legally responsible for the preservation and protection of public property adjacent to the private worksite.
Obligee and Bonding Requirements
As stated before, the local government requires the contractor to be bonded. The bonding requirements state that during the contractor’s work, the contractor will not harm or alter the adjacent public property.
It is a good idea for the principal to be informed on all requirements before applying for a bond. If the principal acts against the bond and a claim is filed, then the surety company will pay for all paid claims which the principal must pay back to the surety.
For example, in California, the California Department of Transportation (the obligee) requires an encroachment permit performance bond. The bond allows any contractor to legally work within, under, or over a state highway. The bond protects state property while private contractors work in a manner that is risky to the property.
Bond Amount and Bond Cost
The cost for the bond is also referred to as the bond premium. The bond premium is the one cost that the surety company sets. All other fees that are related to the bond are set by the obligee. The bond premium is only a small percentage of the bond amount.
The bond amount is set by local government, not the surety company. The bond amount is the amount of coverage the surety company will pay out to the party harmed if a claim is filed against the bond.
Usually, the bond amount is no less than $100,000. The specific bond amount is determined by coverage of the condition of the public property near the private property that is being worked on by the contractor. The obligee sets the bond amount, not the surety company.
For example, if a private contractor is working on a house that shares a property line with a state park, then the contractor must be bonded. The bond would cover the portion of the park that the contractor physically altered.
Additional Information that May Be Needed
When applying for this bond, additional information may be required by the obligee and the surety company. Information that may be required by the contractor is listed below:
- copy of bond requirement from obligee
- business financial statement
- copy of engineer’s estimate
- current bank statement of principal’s company