Adding an Additional Obligee to a bond – here’s what you need to know.
As its name implies, an additional obligee rider is an attachment to a bond which designates an added beneficiary to the bond. By adding an obligee to the bond, the surety assumes an additional obligation to a separate entity which is not party to the bonded contract. The additional obligee is usually a construction lender or another entity that has some interest in the project. Typically, an additional obligee will accept the surety company’s form for the rider. However, we have recently seen an increase in attorney drafted forms that expand the surety’s liability under the bond.
The surety drafted form will contain what our industry calls a “savings clause.” Regardless of who drafts the form, it is imperative that an additional obligee rider contain the savings clause.
An example of a savings clause is the following:
1. The Principal and Surety shall not be liable under this bond to the obligees, or either of them, unless said Obligees or either of them shall make payments to the Principal (or to Surety if it arranges for performance of the Contract) in accordance with the terms of said contract as to payment and shall perform all the other obligations to be performed under said contract at the time and in the manner therein set forth.
2. Provided, however, that the attached bond as changed by this Rider shall be subject to all its agreements, terms and conditions and limitation except as herein expressly modified, and that the liability under the attached bond as changed by this Rider shall not be cumulative and shall be limited in the aggregate to the penalty of the said bond.
The purpose of the savings clause is to place ALL obligees in the same position, and to ensure the liability of the bond is limited to the penal sum of the bond. Without the proper savings clause, an additional obligee rider can turn a performance bond into a completion bond.
What interest does the additional obligee have in the project? Should they be named?
Use a surety form for your protection or confirm a savings clause is present in the rider.
Review other wording in the rider that may expand the liability of the principal and surety?