Bonds and insurance both shift risk, but they work in opposite ways, and the Business and Finance exam likes to test that difference. The outline covers them in Area A ("insurance types and limitations," "underwriting requirements for bonding," "obtain insurance") and Area B ("maintain insurance"). Florida adds its own statute for public work, F.S. 255.05.
Surety bonds: three parties
| Party | Who it is on a contract bond |
|---|---|
| Principal | The contractor, whose performance or payment is guaranteed |
| Obligee | The party protected, usually the owner |
| Surety | The bonding company that guarantees the principal's obligation |
Insurance is a two-party contract: the insurer takes on the insured's risk in exchange for a premium and expects to pay some losses. A surety bond is closer to a line of credit. The surety prequalifies the contractor and expects not to suffer a loss. If it has to pay, it looks to the contractor (and usually the owners personally, under a general indemnity agreement) to repay it.
The three main contract bonds
| Bond | Protects | Against |
|---|---|---|
| Bid bond | Owner | The low bidder refusing to sign the contract or furnish the required bonds |
| Performance bond | Owner | The contractor failing to complete the work according to the contract |
| Payment bond | Subcontractors, suppliers, laborers | The contractor failing to pay them |
The payment bond matters most on public work, because you cannot record a lien against public property. The bond takes the place of lien rights.
Florida public work: F.S. 255.05
F.S. 255.05(1) requires a contractor entering into a contract with the state, a county, a city or another political subdivision or public authority for construction of a public building or public work to execute a payment and performance bond.
Thresholds
| Owner | Threshold | Rule |
|---|---|---|
| The state | $100,000 or less | No payment and performance bond is required |
| County, city, political subdivision or public authority | $200,000 or less | The awarding official or board may exempt the contractor from the bond |
The local threshold is discretionary. A city awarding a $180,000 contract may waive the bond but does not have to.
Claim steps for public bond claimants
Under 255.05(2):
- A claimant not in privity with the contractor (except a laborer) serves the contractor a written notice that it intends to look to the bond, before commencing or within 45 days after commencing to furnish.
- A claimant who has not been paid serves a written notice of nonpayment on the contractor and surety no earlier than 45 days after first furnishing and no later than 90 days after final furnishing.
- A lawsuit on the bond must be brought within 1 year after the performance of the labor or completion of delivery of the materials.
| Step | Deadline |
|---|---|
| Notice to contractor (not in privity) | Before or within 45 days after starting |
| Notice of nonpayment | Not earlier than 45 days after first furnishing, not later than 90 days after final furnishing |
| Suit on the bond | Within 1 year after last labor or delivery |
Compare these with the private-job notice to owner, which also uses 45 days.
Private jobs: payment bonds under F.S. 713.23
On private projects, the owner and contractor may agree that the contractor will furnish a payment bond under F.S. 713.23. The bond that exempts the owner must be at least the original contract price, be furnished before construction starts, and have a copy attached to the recorded notice of commencement. With a conforming bond in place, unpaid lienors look to the bond instead of the owner's property, which protects the owner from paying twice. The notice of commencement lists the surety and bond amount so lienors know a bond exists.
Bonding capacity
A surety decides how much work it will back based on the contractor's financial strength (working capital, net worth, profitability), experience, and character. Some sureties express a program as a multiple of working capital; see financial ratios for a worked capacity example. Strong, accurate financial statements are the price of admission.
Insurance contractors carry
| Coverage | What it covers | What it does not cover |
|---|---|---|
| Commercial general liability (CGL) | Third-party bodily injury and property damage caused by the contractor's operations | Injuries to the contractor's own employees; failure to complete the job |
| Workers' compensation | Employees' work injuries (medical and wage benefits) | Third-party claims |
| Commercial auto | Liability and damage involving business vehicles | Equipment not licensed for road use (typically covered elsewhere) |
| Builder's risk | Damage to the project under construction (fire, wind, theft, per the policy) | Contractor's liability to others |
| Inland marine / equipment floater | Contractor's tools and mobile equipment | Liability |
| Umbrella / excess | Additional limits above underlying liability policies | Coverage the underlying policies exclude |
Florida licensure requires proof of public liability and property damage insurance, as well as workers' compensation, before a certificate or registration is issued or renewed (F.S. 489.115). See workers' compensation for Chapter 440.
How premiums are rated
- CGL is commonly rated per $1,000 of an exposure base such as payroll or gross receipts, depending on the classification.
- Workers' comp is rated per $100 of payroll by class, then adjusted by an experience modification factor.
- Many policies are auditable: the premium is set on estimated exposure and adjusted at year-end to actual. If actual payroll is higher than estimated, expect an additional premium.
Example
A remodeler's CGL rate is $14.00 per $1,000 of gross receipts. Projected receipts are $1,200,000.
Premium = ($1,200,000 ÷ 1,000) × $14.00 = $16,800
Certificates of insurance
General contractors collect certificates of insurance from every sub before work begins and track expiration dates. Under F.S. 440.10, a contractor that hires a sub without workers' comp becomes liable for that sub's injured employees, so a missing certificate can turn into a claim against the contractor.
Exam traps
- Performance bond protects the owner; payment bond protects subs and suppliers.
- The principal is the contractor, not the owner.
- State threshold $100,000; local threshold $200,000, and the local one is discretionary.
- CGL does not cover your own employees' injuries.
- A surety expects to be repaid.
Practice bond and insurance questions
Our Florida Business and Finance Exam Prep includes original questions on surety, F.S. 255.05 and insurance with explanations, plus 90 days of practice across the full exam. Also see the B&F exam overview.
Practice questions
In a contract surety bond, who are the three parties?
- AInsured, insurer, and agent
- BPrincipal (contractor), obligee (owner), and surety
- COwner, architect, and contractor
- DLender, borrower, and guarantor
Show answer
Answer: B. A surety bond is a three-party agreement. The surety guarantees to the obligee (usually the owner) that the principal (the contractor) will perform or pay. Insurance is basically a two-party contract between insurer and insured.
Source: F.S. 713.23 / 255.05 (bond executed by surety for contractor's obligations to owner/lienors)
Under F.S. 255.05, a payment and performance bond is NOT required for state public works contracts of:
- A$200,000 or less
- B$250,000 or less
- C$35,000 or less
- D$100,000 or less
Show answer
Answer: D. F.S. 255.05(1)(d) provides that no payment and performance bond is required when the work is for the state and the contract is $100,000 or less. Counties, cities, and other political subdivisions may exempt contracts of $200,000 or less at their discretion, which is why that figure is the tempting distractor.
Source: F.S. 255.05(1)(d)
A city awards a contractor a $180,000 public building contract. Under F.S. 255.05(1), the payment and performance bond requirement:
- Amay be waived at the discretion of the awarding official or board, because the contract is $200,000 or less
- Bis mandatory because all city contracts require bonds
- Cdoes not apply because only state contracts need bonds
- Dapplies only if the contractor is not licensed
Show answer
Answer: A. For county, city and political subdivision work, the awarding official or board has discretion to exempt contracts of $200,000 or less. Bonds are not automatically required at that size, nor are local projects outside the statute.
Source: F.S. 255.05(1)(d)
Which statement best describes the difference between a performance bond and a payment bond?
- AA performance bond pays injured workers; a payment bond pays the owner's lender
- BBoth protect the contractor against owner nonpayment
- CA performance bond protects the owner against the contractor's failure to complete the work; a payment bond protects subcontractors and suppliers against nonpayment
- DA payment bond is insurance for the contractor's own losses, and a performance bond covers jobsite theft
Show answer
Answer: C. A performance bond guarantees completion of the contract for the owner; a payment bond guarantees payment to those who furnish labor and materials (in Florida, claimants under F.S. 255.05 or 713.23). Neither protects the contractor itself.
Source: F.S. 255.05(1); F.S. 713.23
Commercial general liability (CGL) insurance primarily protects a contractor against:
- Ainjuries to the contractor's own employees
- Bdamage to the contractor's own equipment
- Cthe contractor's failure to finish the job
- Dclaims by third parties for bodily injury or property damage caused by the contractor's operations
Show answer
Answer: D. CGL covers the insured's legal liability to others for bodily injury and property damage. Employee injuries fall under workers' compensation, and failure to complete is handled by a performance bond.
Source: Standard insurance terminology
How does a surety bond differ from a typical insurance policy with respect to losses?
- AThe surety expects to be repaid by the contractor (principal) for losses it pays, usually under an indemnity agreement
- BThe surety absorbs losses with no right of repayment
- CA surety bond protects the contractor rather than the owner
- DA surety bond replaces the need for workers' compensation coverage
Show answer
Answer: A. Surety is a form of credit. The contractor (and often its owners personally) signs a general indemnity agreement promising to reimburse the surety for any losses it pays. Insurance, by contrast, pools risk and expects losses without repayment by the insured.
Source: Surety underwriting principle (standard industry practice)
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