Surety: Basic Terminology
Surety Bond
A surety bond is a written agreement in which monetary compensation is provided by the Surety if the Principal in question fails to complete their required responsibilities provided by the Obligee within a stated period.
Suretyship
Obligation to pay the debts of, or answer for, the default or miscarriage of another.
Surety
Responsible for answering to the Obligee regarding the Principal’s failure to perform.
Principal
Holds responsibility to perform responsibilities as outlined by the Obligee.
Obligee
Party to whom a bond is given and is protected against loss.
Surety Terminology: Documents & Authority
Documents
Bond Form
Mostly written in three paragraphs outlining the following: insuring clause, reason and guarantees, consequences of failure to perform. These are provided by Sureties or Obligees and is then filed with the Obligee once all parties (Surety, Principal, Obligee) have completed and signed.
General Indemnity Agreement (GIA)
A “master agreement” required by most Sureties when multiple bonds are written for the same Principal.
Indemnity Agreement
When the Surety has paid on behalf of the Principal, the Principal must repay (indemnify) the Surety for the loss.
Application
A “picture” of the customer providing detailed information about the applicant to aid in the underwriter’s decision.
Authority
Indemnitor
One who enters into an agreement with a Surety company to hold the Surety harmless from any loss or expense it may sustain on a bond issued on behalf of the indemnitor.
Fiduciary
An individual who manages money or property for another.
Attorney-In-Fact (AIF)
Individual authorized by Surety Company to sign bonds on its behalf. This is granted by a surety company and is typically an insurance agent or broker.
Power of Attorney (POA)
Authorizing an individual to perform as another’s agent or Attorney in Fact.
Surety Terminology: Underwriting
The decision-making process the underwriter (UW) goes through prior to approving or declining a bond. Their job is that of a credit analysts as credit if often a determining factor for the rate. Underwriters determine a multitude of factors such as the possibilities for the Surety’s undertaking a particular risk, premium, conditions a potential Principal should meet, and necessity for the Principal to file collateral to support the risk.
Surety Terminology: Underwriting Process
Collateral
Anything of value pledged with the Surety to protect the Surety against loss by reason or default of the Principal.
Indemnity/Indemnify
When the Surety has paid on behalf of the Principal, the Principal must repay (indemnify) the Surety for the loss.
Forfeiture Clause
Provides payment of the full penalty regardless of the actual amount of the loss or damage sustained by the Obligee. When such a condition exists, the Surety may require collateral prior to issuing the bond.
Penalty
Determined by the Obligee, usually for the same amount of the instrument or sometimes twice the amount
Conviction Clause
A fraudulent or dishonest act of any employee of the insured shall mean an act which is punishable under the criminal code in the jurisdiction within which the act occurred, for which said employee is tried and convicted by a court of proper jurisdiction.
Joint Venture
The joining of the financial resources and skills of two or more contractors to undertake contracts of construction too large or difficult for their separate abilities.
Recommendation
Can make a difference in a bond getting approved. This tells the underwriter why the applicant would make a good risk.
Quote
The premium only and not necessarily a commitment for acceptance of the bond.
Financial Statement
Financial presentation includes the balance sheet, statement of earnings, and other disclosures which the Surety requires of an applicant.
Maintenance Guarantees
Maintenance repairs or guarantees against defective materials or workmanship given in conjunction with license and permit bonds. One year guarantee – no charge. Rate is typically between 0.5% and 3% of the total bond amount for standalone bonds, or 0.1%–0.3% of the contract amount annually if included with a performance bond for an extended period. The exact rate depends on the contractor's credit score, the size and scope of the project, the type of work, and the surety company
Termination
Right of Surety to terminate a license and permit bond depends on whether such right is permitted by law, ordinance or regulation under which bond is required, or by the terms of the bond itself.
Rates
Presently, companies are still using the Surety Association rates. Companies may now file their own rates subject to State approval.
Surety Terminology: Bond Types & Terms
Single Obligation Bond
Covers a specific obligation
Example: lost instrument and contract bonds.
Annual Bond
Run for an annual term and must be renewed from year to year with a renewal bond for the new term.
Continuous Bond
Remain in force from year to year until formally cancelled by the Surety.
Renewal Bond
Normally only one copy of the renewal bond is mailed to either the client or agent depending on billing type. This is then signed by the Principal and/or countersigned by representative of the Surety. The bond is then filed with the Obligee.
Term or Period
The term or period covered by a license or permit bond corresponds to the term or period covered by the license or permit. The right to file claims under any bond for losses sustained while the bond is in force continues for varying periods, depending on the bond.
Continuous Bond
Remain in force from year to year until formally cancelled by the Surety.
Renewals
Processed by the Surety in advance of the renewal date and consist of a renewal bond, continuation certificate, and/or invoice.
Term Cancellation
Have a specific term and expire on the provided date.
Example: Notary Bond
Continuation Certificate
Document extending a renewable term bond.
Cancelable
Days can vary between 30-60+ days. Code/law can help determine cancellation dates.
Example: Contractor License Bond
Non-Cancelable
The Surety cannot independently sever from the obligation even if the Principal (bondholder) is dishonest or have not paid their premium.
Example: Court Bonds
Surety Terminology: Financials
Advanced Payment of Premiums
Annuals premiums for a License or Permit bond, written or to be written for the same Principal in the same amount are paid in advance for two years or more. The annual premium is $50 or more, a discount of 25% shall be allowed on premiums for second or subsequent years.
Contract Price
Sum of money which passes from the owner to the contractor when financial settlement is made between the parties to the contract. It is used as the basis for the premium charge on most types of construction and supply contract bonds.
Invoice
Continuous bonds that do not need a renewal bond or a continuation certificate are renewed by invoice only and is not filed with anyone.
Example: Probate and Fidelity bonds
Annual
Earned minimum is $50 or $100 on most bonds. Premiums are usually figured on a per-one thousand basis with sliding scales in some cases.
First Year & Renewal Premiums - Adjustments
The first year and renewal premiums for all bonds for which term premium is not application shall be adjusted pro-rate upon termination subject to an annual earned minimum of $50 or $100.