Any contractor applying for a construction permit in an encroachment situation will most likely be required to purchase an encroachment bond. The required amount of the bond will be commensurate with the permitting authority’s estimate of the potential for financial loss if the contractor fails to live up to the terms of the bond.
Encroachment Bonds for Public Work
Contractors working within public rights of way need an encroachment bond when an agency requires protection for roads or sidewalks. Surety Bonds Agent provides nationwide quote guidance with a quick process. Request an encroachment bond quote online.
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What Are Encroachment Bonds?
“Encroachment” is defined as an act of intrusion and is most often used in the sense of encroaching on property belonging to another. It comes into play in the construction world when a contractor is hired by a private entity, such as a phone company, advertiser, or utility company, to place a structure such as a cell tower, billboard, or utility pole on the private property immediately adjacent to public land. Erecting that structure, for example placing a billboard alongside a state highway, would encroach on land under the jurisdiction of the state’s Highway Department or other public entity.
That public entity will require the contractor placing the billboard on behalf of the private company to purchase an encroachment bond before beginning construction as a guarantee of compliance with applicable state laws. This type of surety bond makes the contractor responsible for protecting the adjacent public property, repairing any damage to it resulting from the installation of the billboard, and restoring the public property to its original condition when the contractor’s work is done.
Who Needs Them?
How Do They Work?
An encroachment bond is legally binding on the three parties to the surety bond agreement: the “obligee,” the “principal,” and the “surety.” The state highway department or other government entity requiring the bond is the obligee, the contractor applying for a permit is the principal, and the bond’s guarantor is the surety.
If the principal violates any of the terms of the surety bond agreement and fails to remediate the situation voluntarily, the obligee can file a claim for damages against the encroachment bond. The principal bears the full legal obligation for paying any valid claim against the bond. The surety will investigate the legitimacy of a claim before deciding that it must be paid.
At that point, you might expect that the principal would go ahead and pay the claim. But the usual practice is for the surety, in the role of guarantor, to pay a claim on the principal’s behalf and then collect repayment from the principal. Any difficulty in collecting on that debt can result in the surety taking legal action against the principal.
What Happens if a Claim is Filed?
The principal bears the full legal obligation for paying any valid claim against the bond. The surety will investigate the legitimacy of a claim before deciding that it must be paid.
At that point, you might expect that the principal would go ahead and pay the claim. But the usual practice is for the surety, in the role of guarantor, to pay a claim on the principal’s behalf and then collect repayment from the principal. Any difficulty in collecting on that debt can result in the surety taking legal action against the principal.
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What Do They Cost?
What you will pay as the premium for an encroachment bond depends on the required bond amount established by the obligee and the premium rate assigned to you by the surety, and that depends on how risky the surety thinks it would be to pay a claim on your behalf with trust that you would repay the debt. The premium rate determination will be based largely on your personal credit score, which is the best measure of that risk. If your credit is good, this suggests the risk you would repay the surety is high, your premium rate would therefore be low, probably in the range of one to three percent.
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