In surety bonding, an All Rights Letter is needed when a project is already in progress before a contract bond such as a performance bond or payment bond is needed. A more technical term for this document is an Affidavit of Obligee, but in the surety industry, they are known as All Rights Letters.
The purpose of an All Rights Letter is to make sure that there are not any known issues on the project before issuing a bond. In most cases, a contract bond should be requested and issued before the project begins. The bond company is trying to prevent adverse selection.Â
For example, suppose a project is 20% complete when a bond principal requests performance and payment bonds on a construction project. The surety company will wonder if there is a problem on the project. It would be natural for the project owner to want protection after they are aware of a problem. Therefore, the surety will need assurances that the principal is not behind on payments, or in danger of default. Otherwise, the surety risks providing a bond and having an immediate bond claim.
There are many forms that can be used for an All Rights Letter. Some are very general, and some are very detailed. Generally, the letter will include at least the following:
An All Rights Letter should be on the Obligee’s letterhead and signed by the obligee. While many acceptable forms exist, you may find a sample All Rights Letter template on our Surety Bond Resources page. Some sureties may have their own form to be used. Check with your broker or surety bond company first.
All Rights Letters are needed anytime that a project needing a bond has already substantially begun. There are many valid reasons for this to happen. For example, a performance and payment bond may have been required in the contract and the obligee forgot to ask for it. Another example is when a contractor is excited to get started on a project and moves forward without securing a bond.Â
While All Rights Letters give the surety some assurances that there are currently no known issues, they do not prevent the obligee from filing a claim in the future. Projects can go wrong and many different stages and an All Rights Letter does not jeopardize the obligee’s claim rights in most cases.Â
Obligees should complete these letters truthfully though. They should not be completed and signed if the obligee knows of serious project issues that could lead to a claim. Bond companies consider these letters as a material representation of the project, and that could be used against an Obligee if it is discovered that they knew of a claim when they signed the letter.
An All Rights Letter is not the same as a surety prequalification letter. Prequal letters are meant to give assurances that the principal is capable of performing the project and providing bonds for the project. Prequal letters can be used at any time but are normally required before a contractor signs a contract. You can learn more about Surety Prequal Letters.
If an obligee will not sign an All Rights Letter, it will be a big red flag to the bond company. The principal will likely find it impossible to get a bond without the letter, when it is required. These letters are very common and an obligee’s refusal to sign one will signal that the project has problems. Most obligees have no issues in signing All Rights Letters. In cases where there is an issue, a simple conversation with the bond company or broker explaining why the letter is needed, usually resolves any problems.
All Rights Letters are a standard tool for underwriting contract surety bonds. They are needed anytime a bond is needed for a project that has already started. Learn more about surety bonds by visiting our Complete Guide or Contact the bond experts at Axcess today.Â
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
