SURETY BONDING - Sandi Kruise Insurance …Because of the intricacy of the bonding process, and the...

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SURETY BONDING

SANDI KRUISE INSURANCE TRAINING 1-800-517-7500

www.kruise.com


TABLE OF CONTENTS

OVERVIEW OF SURETY BONDING .......................................................................................... 6 HISTORY OF SURETY .............................................................................................................. 6 PURPOSE OF SURETY BONDS ............................................................................................... 7

Surety Contrasted with Insurance ........................................................................................... 8 Surety Bonds in Construction ............................................................................................... 11

Types of Contract Surety Bonds ........................................................................................... 12 Benefits of a Bond ................................................................................................................. 12 Obtaining Bonds ................................................................................................................... 14 Qualifying for Construction Surety Bonds ............................................................................ 14 Prequalification of the Contractor ......................................................................................... 14 Putting Together the Bond Package .................................................................................... 15 Financial Statements ............................................................................................................ 16 Quality of Financial Statements ............................................................................................ 16 Accounting Methods ............................................................................................................. 17 Submitting the Case to the Surety ........................................................................................ 17 Contractor Failure ................................................................................................................. 18 Claims Handling .................................................................................................................... 20 Owner’s Obligation ................................................................................................................ 21 Bond Costs ............................................................................................................................ 21 Average Cost of Surety Bonds ............................................................................................. 22 Surety Bond Producer .......................................................................................................... 22 Surety Companies ................................................................................................................ 23 Choosing a Surety Company ................................................................................................ 24 Personal Indemnity ............................................................................................................... 24 Allow Sufficient Time ............................................................................................................ 25

SUBCONTRACT BONDS ........................................................................................................ 26 COVERAGE .......................................................................................................................... 26 RATE AND PREMIUM .......................................................................................................... 26

UNDERWRITING ...................................................................................................................... 26 IN EVENT OF LOSS ............................................................................................................. 27

Bid, Performance & Payment Bonds Required For Public Construction Projects ............. 29 Types of Surety Bonds ........................................................................................................... 30 Contract Bonds ....................................................................................................................... 30 CONSTRUCTION CONTRACT BONDS .................................................................................. 30

Types of Construction Bonds ................................................................................................... 30 Bond Forms ............................................................................................................................... 30 Underwriting Contract Bonds .................................................................................................... 31

HISTORICAL BACKGROUND ............................................................................................. 32 COVERAGE .......................................................................................................................... 32 TYPES OF CONTRACT BONDS ......................................................................................... 33

Bid or proposal bond .............................................................................................................. 33 FUNCTION ............................................................................................................................ 34

UNDERWRITING ...................................................................................................................... 34 RATE AND PREMIUM .......................................................................................................... 34

BID BOND SERVICE UNDERTAKING .................................................................................... 34 ALTERNATIVE TO CASH DEPOSIT ................................................................................... 35 EXCLUSIONS AND LIMITATIONS ...................................................................................... 35 CONDITIONS ....................................................................................................................... 35 ACCEPTABILITY .................................................................................................................. 35


RATE AND PREMIUM .......................................................................................................... 35 Performance bond .................................................................................................................. 36 Payment bond ......................................................................................................................... 39

COVERAGE .......................................................................................................................... 40 IN EVENT OF LOSS ............................................................................................................. 40 BOND PERIOD ..................................................................................................................... 40

UNDERWRITING ...................................................................................................................... 40 PROCEDURE ....................................................................................................................... 40

Maintenance bond .................................................................................................................. 41 Completion bond .................................................................................................................... 42

EXCLUSIONS AND LIMITATIONS ...................................................................................... 43 IN EVENT OF LOSS ............................................................................................................. 43 BOND PERIOD ..................................................................................................................... 43

UNDERWRITING ...................................................................................................................... 44 MISCELLANEOUS CONTRACT BONDS ................................................................................ 46 SUPPLY CONTRACT BOND ................................................................................................... 46

RATE AND PREMIUM .......................................................................................................... 46 LICENSE AND PERMIT BONDS ............................................................................................. 48

Guarantee Compliance with Various Ordinances .................................................................... 48 COVERAGE .......................................................................................................................... 48 REQUIRED OF INSURED.................................................................................................... 49 MISCELLANEOUS ............................................................................................................... 49

UNDERWRITING ...................................................................................................................... 50 RATES AND PREMIUMS ..................................................................................................... 50

NOTARY PUBLIC BOND ......................................................................................................... 51 COVERAGE .......................................................................................................................... 51 PENALTIES .......................................................................................................................... 51 STATUTE REQUIREMENTS ............................................................................................... 52

UNDERWRITING ...................................................................................................................... 52 PROCEDURE ....................................................................................................................... 53

BONDS FOR SPECIAL PUBLIC BOND ISSUES ..................................................................... 53 SURETY SAFEGUARDS ..................................................................................................... 53 THE CUSTODIAN ................................................................................................................. 54 RATES AND PREMIUMS ..................................................................................................... 54

Bonds That Run to State and Local Governments ............................................................... 54 General Form. ........................................................................................................................... 54 Abstracters ................................................................................................................................ 55 Master Electricians .................................................................................................................... 55

Public Officials Bonds ............................................................................................................ 57 PUBLIC EMPLOYEES DISHONESTY BOND .......................................................................... 57

COVERAGE .......................................................................................................................... 57 EXCLUSIONS ....................................................................................................................... 58 LIMITS ................................................................................................................................... 58 OTHER PROVISIONS .......................................................................................................... 58 ENDORSEMENTS ................................................................................................................ 58 UNDERWRITING .................................................................................................................. 59 BOND HAZARDS ................................................................................................................. 59 INDIVIDUAL AND SCHEDULE BOND RATES ................................................................... 60 Surety Association of America .............................................................................................. 60 Scope of Coverage ............................................................................................................... 60 Public Funds ......................................................................................................................... 61


Statutory Public Officials Bond ................................................................................................. 61 Position Schedule Public Official Bond .................................................................................... 62 Name Schedule Public Official Bond ........................................................................................ 63 Rating ........................................................................................................................................ 65

Judicial Bonds ........................................................................................................................ 65 Court Bonds ............................................................................................................................ 66

CIVIL ARREST ..................................................................................................................... 66 CLAIMANT'S BOND ............................................................................................................. 66

COURT BONDS FOR PLAINTIFFS AND DEFENDANTS ........................................................ 67 COURT BONDS FOR DEFENDANT ........................................................................................ 67

RELEASE OF ATTACHMENT BOND ...................................................................................... 68 DISTRAINT FOR RENT ........................................................................................................... 68 DISCHARGE OF MECHANICS LIEN BOND ........................................................................... 68 COUNTER REPLEVIN BOND .................................................................................................. 68 COSTS BOND .......................................................................................................................... 69 APPEAL BOND ......................................................................................................................... 69 STAY OF EXECUTION BOND ................................................................................................. 70 BOND TO DISSOLVE INJUNCTION ....................................................................................... 70 BAIL BONDS............................................................................................................................. 70 Bail Bond Agents ...................................................................................................................... 71

COURT BONDS FOR PLAINTIFF ............................................................................................ 72 ATTACHMENT BONDS ........................................................................................................... 72 REPLEVIN BONDS .................................................................................................................. 73 INDEMNITY TO SHERIFF BONDS ......................................................................................... 74 COSTS BONDS ........................................................................................................................ 75 COSTS ON APPEAL ................................................................................................................ 75 INJUNCTION BONDS .............................................................................................................. 75 Collateral Security ..................................................................................................................... 76 Bond Forms ............................................................................................................................... 76 UNDERWRITING ...................................................................................................................... 76

FIDUCIARY BONDS ................................................................................................................ 78 UNDERWRITING ...................................................................................................................... 79 USE OF APPLICATION ............................................................................................................ 80 SHORT AND LONG-TERM ...................................................................................................... 80 RATE AND PREMIUM .............................................................................................................. 80 Estates of Deceased Persons or Persons Presumed Dead .................................................... 82 Trustees .................................................................................................................................... 82 Estates of Minors or Incompetents ........................................................................................... 83 Equity Trusts ............................................................................................................................. 84 PETITIONING CREDITORS IN BANKRUPTCY ...................................................................... 85 Bankruptcy Bonds ..................................................................................................................... 85

Miscellaneous Fiduciary Classes .......................................................................................... 86 Fiduciary Bond Provisions ..................................................................................................... 86

Joint Control .............................................................................................................................. 87 FEDERAL BONDS ................................................................................................................... 88

IMMIGRANTS BONDS ............................................................................................................. 88 INTERNAL REVENUE BONDS ................................................................................................ 89 CUSTOMS BONDS .................................................................................................................. 90

Admiralty Bonds ..................................................................................................................... 96 A Type of Judicial Bond ............................................................................................................ 96 Stipulation for Costs .................................................................................................................. 96


Stipulation for Value in an Agreed Amount .............................................................................. 97 Discharge or Release of Libel .................................................................................................. 97 Stipulation to Appear ................................................................................................................ 98 Limitation Proceedings ............................................................................................................. 98 General Average or Average Contribution ............................................................................... 99 General Average Guarantee .................................................................................................... 99

Miscellaneous Surety Bonds ............................................................................................... 101 INCOME TAX BONDS ............................................................................................................ 102 SUBDIVISION BONDS ........................................................................................................... 102 SALES PROMOTION GUARANTEES ................................................................................... 102 PATENT INFRINGEMENT BONDS ....................................................................................... 102 BLUE SKY BONDS................................................................................................................. 102

UNDERWRITING ................................................................................................................ 103 Itinerant or Temporary Merchants, Transient Photographers, Vendors, Peddlers, Etc ........ 104 Public Amusements -- Theaters, Dance Halls, etc ................................................................ 104 Wholesale Dealers .................................................................................................................. 105

Miscellaneous Types of Bonds ............................................................................................ 106 Assigned Accounts Bonds ...................................................................................................... 106 Auctioneers’ Bonds ................................................................................................................. 107 Dependent Children ................................................................................................................ 107 Divorce Proceedings ............................................................................................................... 108 Feeding of Stock in Transit ..................................................................................................... 108

Indemnity Bonds ................................................................................................................... 108 Contractors Indemnity Bond ............................................................................................... 109 Indemnity To Transfer Agents ............................................................................................ 110

Lease Bonds ........................................................................................................................... 111 LOST INSTRUMENT BONDS ................................................................................................ 113

CLASSES OF INSTRUMENTS .............................................................................................. 113 UNDERWRITING .................................................................................................................... 114 LOST SECURITIES BOND AND AFFIDAVIT ........................................................................ 115

RATE AND PREMIUM ........................................................................................................ 116 Other Miscellaneous Bonds ................................................................................................. 116 Department of Transportation Bond Requirements ........................................................... 117

Brokers, Motor Carriers, and Other Shippers ......................................................................... 117 Brokers .................................................................................................................................... 117

Bond Required .................................................................................................................... 117 Motor Carriers and Other Shippers ........................................................................................ 118

REINSURANCE AND COSURETYSHIP ................................................................................ 119 REINSURANCE ...................................................................................................................... 119

FACULTATIVE AND TREATY INSURANCE ..................................................................... 119 COSURETYSHIP .................................................................................................................... 120

LIMITED OR UNLIMITED ................................................................................................... 120 UNDERWRITING .................................................................................................................... 120

TREASURY LIMITS ............................................................................................................ 120 INDEX ..................................................................................................................................... 122


OVERVIEW OF SURETY BONDING Suretyship is one of the oldest methods of guaranteeing performance. The earliest sureties were individuals who would make a pledge on behalf of friends or relatives; pledges often involved goods, money, or, at one time, even persons. The surety's promise was backed by the full extent of its personal wealth; therefore becoming a surety for another involved great personal risk. As the value and diversity of business transactions increased, personal suretyship became economically unfeasible. Today, most sureties are corporations, and many are owned by, or affiliated with, an insurance company. However, surety is not insurance, and the processes of selling, underwriting, and settling surety claims are very different from the corresponding insurance functions. Suretyship is the pledge of one party (the surety) to another party (the obligee) that a third party (the principal) will faithfully perform its obligations in an underlying contract between the obligee and the principal. In a construction setting, the surety guarantees that a contractor will build a project for the owner in accordance with the construction contract. If the contractor defaults in its performance of the work, the surety must step in to complete the contract on the contractor's behalf or pay the owner's extra costs incurred in completing the work. Contractors, likewise, may require surety bonds of subcontractors. Thus, surety bonds are purchased by the contractor (principal) for the benefit of the owner (obligee). (In the case of subcontract bonds, the subcontractor is the principal and the general contractor is the obligee.)

HISTORY OF SURETY Surety bonds have been used to guarantee the performance of contracts since the beginning of time. The Bible, the Magna Carta and The Merchant of Venice all make reference to the use of suretyship to assure that someone will carry through on promises. Since the late 19th century, surety bonds have been written in the United States by private corporations - and today they are an essential part of everyday business transactions. Surety bonds have been valuable tools since 2750 BC, as evidenced by a Mesopotamian clay tablet that described a guarantee among two farmers and a merchant for tending fields and sharing proceeds. Around 1792-1750 BC, Hammurabi instituted the first known written legal code that refers to suretyship. A Babylonian contract of financial guarantee from 670 BC is the oldest surviving written surety contract. The Roman Empire developed laws of surety around 150 AD that exist in the principles of suretyship today. While suretyship is an ancient practice, it wasn't until the latter part of the 19th century that corporate surety bonds came into being. Since 1893, the U.S. Government has required contractors on federal public works contracts to obtain surety bonds to guarantee that they will perform such contracts and pay certain labor and material bills. The current federal law mandating surety bonds on federal public works is known as the Miller Act (40 U.S.C. Section 270a et. seq.). It requires performance and payment bonds for all public work contracts in excess of $100,000 and payment protection, with payment bonds the preferred method, for contracts in excess of $25,000. Also, almost all 50 states, the District of Columbia, Puerto Rico,


and most local jurisdictions have enacted similar legislation requiring surety bonds on public works. These generally are referred to as "Little Miller Acts."

PURPOSE OF SURETY BONDS Surety bonds provide financial security and construction assurance by assuring project owners that contractors will perform the work and pay their subcontractors, laborers, and material suppliers. A surety bond is a risk transfer mechanism where the surety company guarantees to the obligee (the owner) that the principal (the contractor) will perform a contract. There are three primary types of surety bonds used in construction: bid, performance, and payment bonds. Project owners obtain a number of benefits from surety bonds, the most important of which are the assurances that the project will be completed and that the completed project will be free of liens by suppliers and subcontractors. The surety's prequalification of the contractor/principal provides reassurance that the contractor's experience and financial wherewithal are adequate to perform the work called for in the contract. General contractors obtain these same benefits when they require bonds from subcontractors. Because of the intricacy of the bonding process, and the fact that each surety company has its own unique underwriting standards and practices, contractors turn to surety bond producers to secure the surety bond on their behalf. The contractor includes the cost of the bond premium in his/her bid price. The surety company typically charges only for the final bond(s) when the contractor is awarded the contract. Several organizations that serve the surety industry are valuable resources for surety information and are listed below.

SURETY ORGANIZATIONS

Surety Association of America (SAA) 1101 Connecticut Avenue, N.W, Suite 800 Washington, DC 20036 Telephone: 202-463-0600 Fax: 202-463-0606 http://www.surety.org Surety Information Office (SIO) 5225 Wisconsin Avenue N.W., Suite 600 Washington, D.C. 20015 Telephone: 202-686-7463 Fax: 202-686-3656 http://www.sio.org

National Association of Surety Bond Producers (NASBP) 5225 Wisconsin Avenue N.W., Suite 600 Washington, D.C. 20015 Telephone: 202-686-3700

Fax: 202-686-3656 http://www.nasbp.org


Surety Contrasted with Insurance Many surety companies are owned by, or affiliated with, an insurance company; producers who sell and transact surety must be licensed by their state’s insurance department. Surety is not really a form of insurance. Bonding operations are typically autonomous operating units that have little interaction with insurance divisions even when they are housed together. Although surety bonding is legally a part of the insurance industry, it shares many characteristics of bank credit. The surety company's primary obligation is to back the contractor's commitment to completing the contract, thus enabling the contractor to acquire a contract with an owner. The owner receives guarantees from a financially responsible surety company that the contract will be fulfilled. Unlike other types of insurance, which maintain deductibles and charge premiums based on the probability of expected loss, surety companies do not expect a loss. The surety bond premium is a fee for underwriting or pre-qualifying the contractor. A side-by-side summary comparison of some of the more fundamental differences between surety and insurance is provided below.

SURETY VERSUS INSURANCE

SURETY: INSURANCE:

Is based on an underlying contract Is independent of other contracts

Is a three-party contract Is a two-party contract

Covers all defaults without regard to the cause

Covers fortuitous losses, subject to certain exclusions

Underwriter expects no losses Underwriter expects some losses within a class of insureds

Allows subrogation against the principal Subrogation against a negligent insured violates the purpose of the insurance policy, and thus is not allowed

May require principal shareholders to pledge personal assets as collateral for claims

Does not require owners to pledge personal assets

Bonds are non-cancellable Policies frequently are cancellable

Unlike an insurance policy, a surety bond is predicated on an underlying contract, the terms of which are incorporated by reference in the bond agreement. Consequently, an important part of a surety's underwriting review involves assessing the contract terms, including the type and scope of work, the expected date of completion, payment provisions, and various other contractual issues that might affect the contractor's ability to complete its work under the contract. In the event of a default, the surety's obligations will be determined by the underlying


contract. In contrast, insurance policies stand on their own merit and are not predicated upon the existence or terms of any other contract. Surety is a three-party contract. The principal purchases the bond from the surety for the benefit of the obligee. Although the obligee does not sign the bond, it does have certain duties under the bond, and failure to meet these obligations may result in a forfeiture of the right to collect under the bond. Even when an insurance policy is intended to pay third parties, such as a liability insurance policy, the contract is between only the insured and the insurer; third-party claimants rarely have contractual rights or obligations under the insurance policy. Furthermore, liability policies are purchased not for the benefit of injured third parties, but to protect the insured from the economic consequences of certain legal liabilities and associated legal expenses. Surety bond claims are triggered not by any actual or impending loss to the principal (e.g., contractor), but to the obligee (e.g., owner.) In fact, when a contractor walks away from a job is that it has become too much of a drain on the contractor's resources, the contractor's short-term situation actually has improved because it abandoned the project. (In the long term, however, the default may damage its reputation and make it more difficult for the contractor to obtain bonds and work. Further, the surety is entitled to seek reimbursement for claims paid under the bond. In some instances, the contractor's personal assets may even be at risk.) Insurance is designed to cover fortuitous losses, which are neither expected nor intended, such as damage from an accident. Insurance policies almost always exclude losses that are intentionally caused by the insured. Surety bonds, on the other hand, will respond even when the contractor deliberately breaches its contract. Unlike an insurance policy, which is intended to protect the insured from the costs associated with injuries or damages, bonds are intended to protect a third party, the obligee. For the bond to hold any value to an obligee, such as a project owner, the obligee must be certain that the surety will respond to a default regardless of the contractor's reasons for not completing the agreed upon work. Thus the surety's obligation to the obligee is not nullified by intentional acts of the contractor. Another fundamental difference between bonds and insurance lies in the expectations of the underwriter. Although they do not know which insureds will suffer a loss, insurance underwriters know that a certain number of losses will occur. Insurance is merely a mechanism for spreading the relatively few losses that do occur among a larger group to limit the impact of a loss on any one member of the group. In contrast, surety losses typically are viewed as being largely preventable because the events are, for the most part, within the contractor's control. For example, contractors sometimes take on too many projects simultaneously and become overextended and unable to complete all of the projects by the agreed-upon completion dates. In these circumstances, the default(s) could have been avoided entirely by taking on fewer projects, which is within the contractor's control. The surety underwriter's job is to assess the contractor's ability to fulfill its obligations under the contract in question. If the underwriter has any serious doubts as to the contractor's ability to perform the work called for in the contract, it will not issue the bond. While some underwriters will inevitably perform more diligent reviews than others, an underwriter who issues a surety bond is reasonably confident that there will be no claims made against the bond. Therefore, the bond premium is primarily a reflection of the surety's underwriting costs plus a fee for the use of the surety's name and financial backing. Unlike insurance, "expected losses" are not part of the bond premium formula.


Virtually all property and casualty insurance policies allow the insured to cancel at any time, and the insurer generally may cancel after giving the required notice to the insured. At a minimum, insurers typically retain the right to cancel if the insured fails to pay interim premiums when they become due. Surety bonds, once written, generally cannot be cancelled. The obligee needs to know that the surety cannot back out of the bond contract if the contractor's financial condition worsens. Most insurance policies uphold the insurer's right to subrogate against negligent third parties for damages paid under the policy. However, if the insured negligently causes damage that is covered under its own policy, the insurer cannot pay the claim and then attempt to recover these payments from the insured. In contrast, sureties can subrogate against defaulting contractors despite the contractual relationship between the parties. When a surety bond is available, the surety steps into the defaulting contractor's shoes to complete the contractor's work under the contract. The surety is then subrogated to the owner's rights to recover expenses incurred in obtaining performance of the contract from the defaulting contractor, just as a bank has the right to recover from a borrower who has defaulted on a loan. Sureties often require principals (and typically their spouses), to pledge their personal assets to indemnify the surety for costs incurred in obtaining performance after a default. The surety can seek recovery of monies paid out in bond claims from the principal's personal assets, as well as from any remaining corporate assets.


Surety Bonds in Construction Surety bonds have played an important role in the construction industry's success, allowing the industry to sustain its position as one of the largest contributors to the nation's economic stability and growth. Suretyship is a loss-avoidance mechanism to pre-qualify contracting firms based on their credit strength, experience, and capability to successfully complete contracts. The economic risk of contractor default stays with the bonded contractor, who must sign an indemnity agreement holding the surety harmless. When it issues a surety bond, the surety company offers assurance to a project owner that the contractor is capable of performing the contract according to its terms and conditions. The surety company also guarantees that the contractor will pay certain laborers, subcontractors, and suppliers associated with the project. Today's construction industry is more competitive than ever, and more contractors are interested in projects that require them to provide surety bonds guaranteeing their performance of the contract. Surety bonds are usually required of general contractors on public projects of federal, state or local government agencies. But many subcontractors also find that they are being asked to provide bonds. And an increasing number of private project owners are requiring bonds as well. Construction surety bonds (bid, performance and payment) enable open, competitive bidding for public construction to function smoothly. Bonds are required on most public work projects, which are awarded under a competitive, sealed, open competition bidding system where the work is awarded to the lowest responsive bidder. To protect tax-payer dollars from irresponsible bidders and incapable contractors, Congress passed the Heard Act in 1894, which required contractors to obtain surety bonds on public work. The Heard Act was later replaced by the Miller Act of 1935, which mandates performance and payment bonds on all federal public work contracts in excess of $100,000. Most state and local governments have adopted similar legislation (often referred to as "Little Miller Acts"). The requirements vary by state. While law on public works projects to protect taxpayer dollars mandates surety bonds, the use of surety bonds on privately owned construction projects is at the owner's discretion. With a surety bond, the risks of project completion are shifted from the owner to the surety company. For that reason, many private owners require surety bonds from their contractors to protect their company and shareholders from the enormous cost of contractor failure. Subcontractors may be required to obtain bonds to help the prime contractor manage risk, particularly if the subcontractor is a significant part of the job or a specialized contractor that is difficult to replace. Contract surety bonds are three-party agreements whereby one party (the surety company) guarantees another party (the owner) that a third party (the contractor) will perform the contract. The owner specifies the bond requirement in the contract documents. It is the contractor’s responsibility to secure the bonds.


Types of Contract Surety Bonds

The bid bond provides financial assurance that the bid has been submitted in good faith and that the contractor is capable of performing the contract at the price bid, and will comply with the conditions of the bid, including entering into a final contract if the successful bidder. It also assures the owner that the surety company will issue the requisite payment and performance bonds. If the contractor is awarded the contract but fails to enter into the agreement, the surety may be required to pay the difference between the awarded bid and the next lowest bid or pay the bond penalty. The performance bond protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions. If the contractor defaults, the surety will respond in accordance with the terms of the bond. The payment bond guarantees that the contractor will pay certain subcontractors, laborers, and material suppliers on the project. Payment bonds issued by themselves only guarantee that the project will remain lien free for the obligations assumed by the principal. If the contractor fails to pay amounts properly due, the surety will make the payments up to the penal amount of the bond (stipulated in the contract). Generally, payment bonds are supplied at no additional cost when purchased in conjunction with a performance bond. If liens are filed upon the bonded construction project by laborers, material suppliers or subcontractors, the project owner may call upon the surety to arrange for the release of the liens. It may accomplish this in a variety of ways, but generally will provide separate bonds to release the liens.

Benefits of a Bond

Construction surety bonds provide direct protection to owners of building projects as well as laborers, subcontractors and suppliers. At the same time, they either directly or indirectly benefit lenders, architects, engineers, attorneys, risk managers and contractors themselves. Contract surety bonds perform the following functions:

Assure project completion;

Assure a qualified contractor on the project;

Guarantee that laborers, suppliers, and subcontractors will be paid;

Relieve the private owner from the risk of financial loss arising from liens filed by unpaid laborers, suppliers, and subcontractors;

Smooth the transition from construction to permanent financing by eliminating liens on private projects;

Help the contractor grow by increasing construction project opportunities and offering assistance and advice;

Provide intermediaries-the surety company and surety bond producer-to whom the owner can air complaints and grievances;

May lower the cost of construction by facilitating the use of competitive bids; and

Screen out unqualified contractors and irresponsible competition.

Greater pool of qualified contractors bidding for jobs, resulting in greater likelihood of timely project completion and less likelihood of contractor failure;


Payment protection for subcontractors, suppliers, and laborers (Subcontractors and suppliers may submit more competitive prices if they know they’re protected by a payment bond);

Technical, management, and/or financial assistance for the contractor to keep project on schedule;

No liens from unpaid subs and suppliers covered by the payment bond, which will smooth transition from construction to permanent financing; and

Guarantees correction of defects as a result of faulty material or workmanship for at least one year.

Bonds are not, however, without cost, and owners and contractors must make a judgment call about whether and of whom to require bonds. Some owners require the general contractor to bond all subcontractors, reducing the potential for disruptions in the project from a subcontractor failure. In exchange for this protection, the owner can expect to pay a higher construction cost. On certain projects sureties require bonded contractors to bond their subcontractors, as it reduces the likelihood of a claim under the general contractor's bond arising out of a significant subcontractor failure. Are the services of the surety worth the price of the bond? Consider the savings that will result from bonding a project by reducing or eliminating:

1. Staff time needed to prequalify contractors. 2. Costs added by subcontractors and suppliers to offset the risk of not being paid. 3. Costs added by general contractors for administration of payment affidavits or lien rights

procedures. 4. Costs and complications to owner as a result of having to withhold money from the

contractor as a means of imposing discipline or solving problems such as: a. Disputes and slow-downs b. Potential of contractor alleging owner’s breach of contract c. Undelivered materials d. Ill will e. Possible litigation.

5. Direct and indirect costs to owner arising out of contractor default: a. Cost to owner of having to make good on a contractor’s unpaid bills which can include

tax liens b. Staff time and administrative costs associated with processing requisitions and payment

affidavits.

To determine if it is worth it, the contractor should weigh the time and expense of obtaining surety bonds against the benefits of being able to take bonded projects. The decision to seek surety bonds should be based on long-term considerations. To obtain bonds, even some changes in the way the firm does business may be necessary and these changes could have certain costs. A lender can directly benefit from a construction surety bond since a lender benefits from a dispute-free project. It is possible to name the lender as an additional obligee (beneficiary) of a contract bond giving the direct rights under the bond. In such cases, surety companies will require a clause in the bond stating that the surety shall not be liable unless the owner and/or the lender makes all payments and performs all other obligations as provided in the contract.


Reputable contractors support the use of bonds as a legitimate part of the prequalification process. They recognize that bonding tends to screen out unqualified contractors and encourages fundamental fairness in bidding and award procedures. Contractors are generally proud and protective of their ability to obtain bonds and of their bonding credit line.

Obtaining Bonds

The owner includes the requirement for bid, performance, and payment bonds in the contract specifications. Obtaining bonds and delivering them to the owner is the responsibility of the contractor. Since most companies that issue surety bonds do so through producers, also called agents or brokers, the first step toward taking on bonded work is to consult a professional surety bond producer. An agent who specializes in insurance and bonding for the construction industry is likely to be the most qualified. The surety bond producer will guide clients through the bonding process and assist them in establishing a business relationship with a surety company.

Qualifying for Construction Surety Bonds

Qualifying for bonds is more like obtaining bank credit than purchasing insurance. When obtaining bank credit, the financial institution will only provide the loan if it determines the party is capable of repaying it in full with interest. Like a bank, a surety company wants to know the applicant well before extending a line of credit. Most contractors find that it is necessary to spend a lot of time and effort establishing their relationship with a surety company. Since the surety is guaranteeing the company's performance, it must gather and carefully analyze much information about the applicant and their firm before it will agree to provide bonds.

Prequalification of the Contractor

A pre-qualification review is a thorough review of the contractor’s finances, previous experience, and capacity to perform the specifications of the contract. Before issuing a bond, the surety company must be satisfied that the contractor runs a well-managed, profitable enterprise, keeps promises, deals fairly, and performs obligations in a timely manner. The surety must be fully satisfied that the contractor is of good character, has the experience that matches the requirements of the projects to be undertaken, and has, or can obtain, the equipment necessary to perform the work. The surety also wants to make sure the contractor has the financial strength to support the desired work program, and has a history of paying subcontractors and suppliers promptly. It will want to see that the contractor is in good standing with a bank and has established a line of credit. Each surety company has its own underwriting standards and requirements, but there are fundamentals common to underwriting surety bonds. Understanding these fundamentals is helpful to a contractor and their agent seeking surety bonds.


Putting Together the Bond Package

The kind of information clients may need to provide to their surety agent to apply for bonds:

An organizational chart that showing key employees and their responsibilities;

Detailed resumes of the owner and key people;

A business plan outlining the type of work done, how jobs are obtained, the geographic area in which they operate, and the growth and profit objectives;

A description of some of the largest completed jobs, including the name and address of the owner, the contract price, the date completed and the gross profit earned;

A plan outlining how the business will continue in the event of the owner’s death or disablement, or that of another key employee (clients may include life insurance on key people, with the company named as beneficiary);

Subcontractor and supplier references including names, addresses and telephone numbers of persons to contact (the surety will probably also order an independent credit report on the firm);

Evidence of a line of credit at the bank (sureties generally look for an unsecured line of credit that can be used when needed to meet short-term cash requirements; an additional secured line of credit obtained through the long-term financing of equipment or real estate may help to strengthen their case); and

Letters of recommendation from owners, architects and engineers. Capacity to Perform – typically includes analysis of:

Resumes of the contractor and key personnel;

Contractor’s track record of successfully completed work;

Adequacy of the contractor’s equipment and tools required to perform the contract;

Rationale for why the contractor is undertaking the project;

Continuity plan that illustrates how the company will continue performing its obligations in the event of the demise or departure of key personnel; and

Contractor’s future plans, short and long-term goals, objectives, and growth strategies.

Financial Strength Capacity - typically includes analysis of:

Detailed financial statements for the past 3-5 years. Accounting methods should comply with Generally Accepted Accounting Principles (GAAP). Financial statements should include: Balance Sheet, Statement of Earnings, Statement of Changes in Owner’s Equity, Statement of Cash Flow, Notes to Financial Statements, and Contract Schedules. The surety may ask for interim financial statements. Requirements for interim statements vary, but a six-month statement usually is the minimum.

Contract schedules that typically include a summary of completed contracts and contracts in progress. Sureties also will require a schedule of work in progress (usually quarterly). This schedule should list each job by name and indicate the total contract price including: change orders, amount billed to date, cost incurred to date, revised estimate of the cost to complete, estimated gross profit, and the anticipated completion date;

Cost records that account for the financial status of the contractor’s jobs;

Credit reports demonstrating how the contractor handles payment of debts; and


A bank line of credit showing unsecured credit that can be used as short-term working capital.

Character-Surety companies may review trade references from owners, architects, subcontractors, general contractors, material suppliers, etc., with whom the firm has worked to get a sense of the contractor’s reputation for fair, businesslike dealings.

Financial Statements

Financial statements are vital to any business that grants credit, and sureties are no exception. Depending on how long the firm has been in business, the surety will want to see fiscal year-end statements for the last three to five years. Financial statements should include the following:

The Accountant's Opinion Page, which discloses whether the statements were prepared according to audit, review or compilation standards.

The Balance Sheet, which shows the assets, liabilities and net worth of the business as of the date of the statement. This helps the surety company assess the working capital and overall financial condition of the company.

An Income Statement, which measures how well the business performed. The surety will assess each item, including gross profit on contracts, operating profit and net profit before and after tax provisions.

A Statement of Cash Flow, which discloses the cash flow movements from operating, investing and financing activities.

Schedules of Contracts in Progress and Contracts Completed, which show the financial performance of each contract and provide insight into the potential for future earnings from contracts in progress.

A Schedule of General and Administrative Expenses, which may reveal how well overhead expenses are controlled and managed.

Any Explanatory Notes that the accountant may have included with the statements.

The surety may also require aging schedules of accounts receivable and payable as well as schedules for any other items on the statements that might need such support.

Quality of Financial Statements

Accountants prepare financial statements on three levels: an audit, a review, or a compilation. Sureties prefer audited fiscal year-end statements, but there are occasions when a surety may accept a review statement, which is far less comprehensive than an audit. Review statements consist principally of inquiries of the company's people and the application of certain analytical procedures to the financial data. Although far narrower in scope than a full audit, the review provides some limited assurance about the financial statements. A compilation, however, provides no assurance, or very limited assurance, as to the credibility of the figures presented because the accountant is not required to follow normal audit procedures or acceptable accounting principles. In general, neither a statement prepared by the client’s own staff nor a compilation statement is acceptable to sureties, because they are difficult to verify and lack the stamp of approval of an


independent auditor. While sureties may offer modest programs based on review statements, the trend is toward requiring audited financial statements. Many sureties will insist that at least the most recent fiscal year-end statements be prepared to full audit standards.

Accounting Methods

Complete and accurate cost recording and accounting systems are extremely important to surety companies. Without these systems, the contractor may not be able to identify and correct problems before they become too severe. Although there are a number of accounting methods available for contractors, in most instances the American Institute of Certified Public Accountants Audit Guide for Construction Contractors recommends a method called percentage of completion. This method is also preferred, and in some cases required, by sureties. Generally, this method best represents a contractor's financial condition and most accurately measures results of work performed during the accounting period. Depending on the time elapsed since the last fiscal year-end statement, the surety may ask for an interim financial statement to show how the current year is progressing. While the requirement for interim statements varies, a six-month statement is usually the minimum. They will also need to prepare a schedule of work in progress, usually quarterly. This schedule should list each job by name and indicate the total contract price, including:

Change orders;

Amount billed to date;

Cost incurred to date;

Revised estimate of the cost to complete;

Estimated gross profit; and the

Anticipated completion date.

The format and the amount of information required, varies among surety companies.

Submitting the Case to the Surety

Once the surety producer completes the file it will be submitted to a surety company for review. The company’s underwriter will often ask to meet with the client and other key people. They should be prepared to discuss all aspects of their company's current operations and future plans. Surety companies usually like to have some idea as to the single job size and aggregate workload (including all projects – bonded or not) that they want to undertake. Once the basic arrangements are completed, the surety will be in a position to consider specific bond requests. The underwriter will examine each request and review the terms and conditions of the contract documents and bond forms. If they are found to be unacceptable, the surety may decline to write the bond even though the other underwriting factors are favorable. The surety company’s prequalification process (also referred to as underwriting) carefully analyzes the contractor’s entire business operation, because the surety is backing the promise of that contractor to perform the contract. The surety company evaluates the contractor’s


capacity to perform this particular contract as well as other contracts already written, determines his/her financial strength, reviews his/her character, and may ask for personal or corporate indemnity. The surety bond producer assists the contractor with prequalification Indemnity Agreement-Surety companies may require the personal indemnity of the owners, their spouses, or major stockholder(s) of the construction firm to assure that they are going to put forth their best efforts to meet contract obligations. In some cases, personal assets can increase surety credit available to the construction firm. For a proper evaluation of what loss paying power the personal indemnity does provide, the surety may request the contractor to provide personal financial statements.

Contractor Failure

Construction is a very risky business. According to Dun & Bradstreet's Business Failure Record, an average of 10,000 contractors fail each year, leaving a trail of unfinished private and public construction projects. Surety bonds offer assurance that the contractor is capable of completing the contract on time, within budget, and according to specifications. Contractor default is an unfortunate, and sometimes unavoidable, circumstance. Surety bonds provide dependable, proven, and reliable protection against contractor failure. In the event of contractor failure, the owner must formally declare the contractor in default. When a contractor is in default, a surety has a variety of ways to respond depending upon the specific facts of the case. Each case requires individual treatment. The surety's options often are spelled out in the bond. These options may include the right to re-bid the job for completion, bring in a replacement contractor, provide financial and/or technical assistance to the existing contractor, or pay the penal sum of the bond. In the event of default, the surety will usually start its own investigation immediately and respond as quickly as possible. Ordinarily, the surety will want to keep the project moving since delays increase costs. The size and complexity of the default, the duration of the project and the point at which the default occurred, all have a direct bearing on the time it takes to complete a settlement. Other factors, such as the condition of the contractor’s records, terrain, climate, type of project and other work the contractor might have undertaken also have a bearing on the bond claim process. It is in everyone’s best interest to have the project continue and proper claims paid as soon as possible. Although the prequalification process greatly reduces the likelihood of contractor default, a host of problems can befall a construction project, which may cause the contractor to fail. Contractor failure may be brought on by any of these events or a combination thereof:

Accounting & Financial Management Problems

Inadequate cost and project management systems

Estimating or procurement problems


Poor bidding

Cost Overruns

Lack of adequate insurance

Improper accounting practices (not adhering to the American Institute of Certified Public Accountants Audit Guide for Construction Contractors)

Changes in Ownership and/or Key Personnel

Leadership and focus of company changes (contractor retires, dies, sells company, etc.)

No ownership or management transition plan exists to ensure continuity in the event of death or disability.

Key staff leave company. Inadequate time to train new staff and bring them up to speed on company policy and operations, thus leaving projects ill-managed.

Changes in Strategic Direction

Change in type of work performed by contractor

Changes in the location of the work performed

Significant increases in the size of individual projects

Rapid expansion

Uncontrollable Factors

Economic down-turn and high inflation

Weather delays

Poor site conditions and/or building plans

Labor difficulties (lack of skilled labor)

Failure of subcontractors or suppliers

Material and equipment shortages

Lack of or delay in payments by project owner

Unreasonable project owner

Ineffective Financial Management System

Inability to forecast cash flow

Receivables turning over too slowly

Vendors demanding cash on delivery for supplies and materials

Past due bills

Bank Lines of Credit Constantly Borrowed to their Limits

All credit fully secured

Credit lines not being renewed

Poor Estimating and/or Job Cost Reporting

Erratic bid spreads

Profit margins are thin or not realized


Profit fade

Poor Project Management

Inadequate supervision

Inability to administer and collect change orders

Project(s) not completed on time

One or more contracts with a claim

Company frequently involved in litigation

No Comprehensive Business Plan

Contingency plans not developed

Company has no "road map," goals, or objectives

Continual Downward Spiral

Revenue and margins decrease over time

Continued operating losses

Loss or reduction of bonding capacity

Communication Problems

Disputes between contractor and owner

Poor communication between field and management

Loss of Loyal Customers

Decreasing reputation in the industry

Although these events are not always foreseeable at the time a bond is issued, there are warning signs that a contractor is in trouble.

Claims Handling

When a contractor gets into trouble, the surety may look at several options to avoid further deterioration of the situation and an ultimate default. Default may be averted because of the surety company’s expertise in seeing projects to completion. To avoid default the surety company may:

Provide trained personnel;

Provide direct payment to subs, laborers, and suppliers; and/or

Offer financial assistance to contractor.

While everyone would prefer to avoid default, it is not always possible--especially if the contractor or owner fail to talk about problems as they arise. In the event of default the surety company may, according to the particular language of the bond and construction contract:


Retain the original contractor and: o Provide trained personnel, o Offer financial assistance, and/or o Provide payment for subs and suppliers;

Re-bid the job to another contractor for completion;

Pay the amount of loss up to the penal amount of the bond; or

Pay the full penal amount of the bond.

Owner’s Obligation

An owner only has to perform his or her part of the contract to receive the protection of the bond. It should be emphasized that a bond will protect the owner’s legal rights under the contract by assuring that there will be a responsible party available in the event of contractor default.

Bond Costs

Bond rates are regulated at the state level by the insurance department. Bond forms and rates must be filed by each company in accordance with each states' filing rules. The Surety Association of America files advisory loss costs that surety companies may reference in their filings, along with company-specific multipliers that produce end rates when applied to such loss costs. Alternatively, sureties can develop their own rates. The advantage of using the SAA loss costs is that the state has already approved the filings based on the statistical data submitted by SAA with the filing. Companies who file rates independently of SAA must provide actuarial data to support the proposed rates. Companies that use the SAA loss costs must follow the SAA's Manual of Rules, Procedures, and Classifications for Fidelity, Forgery, and Surety Bonds. In Texas, all sureties are required to use statutory rates for bonds on both public and private projects located in the state. Because of the emphasis on relationship between a contractor and its surety, the surety industry has not been as susceptible to price competition as the insurance industry. Bond costs are based on the type of work called for in the contract, the expected duration of the project, and the contract value. A rough rule of thumb regarding bond costs is that premiums for the bid bond, performance bond, and payment bond will be roughly 1 percent of the contract price for a 24-month project. Maximum aggregate rates may also apply. For projects of longer duration, rates may be slightly higher. Rates are usually stated in units of $1,000 of contract price, and they typically fall incrementally as the contract price increases. Because of the declining rate scale, on very large projects, the total bond cost may be less than 0.05 percent of the contract price. Bond rates include the cost of both a performance bond and a payment bond. The cost of a performance bond is a one-time premium, which typically ranges from 0.5 - 2% of the contract amount, depending on the size and type of the project and the contractor's bonding capacity. There is often no charge for the bid bond, and the payment bond may be issued at no additional charge when issued in conjunction with a performance bond. The cost of the surety bond is referred to as the premium. The premium is a fee for the surety’s prequalification, underwriting, and other services. Due to pre-qualification, the surety underwrites the contractor with the assumption that it will not incur a loss under the bond.


Average Cost of Surety Bonds

Project Amount Sample Bond Premium Percent of Contract Amount

$1 million $7,700-$13,500 .77% to 1.35%

$5 million $33,200-$47,250 .66% to .95%

$10 million $56,950-$81,000 .57% to .81%

$20 million $101,950-$146,000 .51% to .75%

Premiums are approximate, based on premiums from the nation’s top 10 sureties. Some surety

rates may be higher or lower than this example as rates vary from company to company.

Some surety companies offer preferred rates for contractors with proven track records. It is important not to merely seek the absolute lowest rate in the industry. When evaluating the premium, contractors should take into account the opportunities and services that the surety company offers, such as customer service, support, confidence, and capacity to grow.

Surety Bond Producer

The surety bond producer plays an essential role in helping a contractor obtain surety bonds, and is an integral part of the contractor’s external advisory group, which includes attorneys, bank officers, and auditors. Surety bond producers, however unlike these other professionals, receive a commission on the bond premium only if and when the contractor is awarded the job and the bonds are issued. By using his/her specialized knowledge of the construction industry, the surety bond producer prepares the contractor for the surety company’s rigorous prequalification process. A surety bond producer will provide services to assist their clients to qualify for bonds, such as:

Match the needs and strengths of the contractor to the surety that will support him/her. To do that, the producer must understand the dynamics that will affect the surety’s willingness to support the contractor and his/her business, then use that understanding to create and nurture a successful relationship between the contractor and the surety company.

Offer sound business advice, formalized management consulting services, and technical expertise or introduce them to appropriate professionals or consultants. The producer may assist with developing a strategic/business plan, or introduce the contractor to bankers, CPAs, or attorneys to assist the contractor.

Compile financial documents for submission to the surety company. In some cases, the producer may analyze the contractor’s financial statements to determine the contractor’s working capital, net worth, and current revenue recognition based on percent-project- completion before submitting it to the surety company.

Develop written statements explaining net losses in a fiscal year, adjustments to retained earnings, and footnotes that may affect surety credit.

Review contractor’s contracts to help him/her avoid taking on excessive risk.

Conduct background investigation of the contractor’s past contractual obligations.


Recommend a responsible line of credit consistent with the contractor’s capabilities.

Tailor the contractor’s submission for the specific needs and particular requirements of the surety company and guide the contractor through a formal presentation to the surety company.

Maintain communication channels between contractor and surety company with periodic reports on work progress, financial performance, and business plans.

Maintain communication with contractor through site visits, social gatherings, industry meetings, or visits to contractor’s office.

Assist and advise the contractor on how to obtain or increase surety credit. A qualified surety bond producer can offer a candid appraisal of what the contractor can do to meet the surety company’s underwriting standards.

A surety bond producer should have the following qualities:

A reputation for integrity and respect in the industry;

Personal interest in the contractor’s success;

Ability to build solid relationships with surety underwriters;

An understanding of the construction industry and the construction management process, including estimating, bidding, building and cost control systems, and an understanding of basic credit principles;

Knowledge of accounting and finance, especially construction accounting procedures, ability to analyze financial statements, work-in-progress, and cash flow.

Knowledge of construction, subcontracts, and contract law;

Authority to issue bonds on the surety’s behalf (within limits);

Awareness of local, regional, and national construction markets;

Experience in strategic planning and management practices to promote successful contracting; and

The best surety bond producers are a part of the construction community through active involvement in and support of local and national construction and surety industry associations, such as the National Association of Surety Bond Producers (NASBP), Associated General Contractors (AGC), Associated Builders and Contractors (ABC).

Contractors should look for a producer that specializes in bonding for the construction industry. Many surety bond producers also handle other lines of insurance applicable to managing construction operations, such as Builders' Risk Insurance, Mobile Equipment Insurance, Commercial General Liability, Personal Liability, Workers' Compensation, Insurance for Building and Contents, and Crime Coverage.

Surety Companies

Surety bonds are provided by licensed surety companies which are willing to commit their assets in support of their contractor clients. Owners and contractors alike should be as concerned with a surety's reputation and financial position as the sureties are with the contractors they bond. Although the state insurance departments regulate bonds, thinly capitalized or offshore-domiciled companies that could disappear overnight sometimes fraudulently issue them. In addition, if a surety company doesn't respond quickly to prevent or manage a default, the project can be seriously delayed. If


the delay is significant, it can produce a domino effect by causing one or more subcontractors to also default. Owners and contractors have several options for verifying a surety's financial capacity to support their bonds. Various insurance company rating organizations, such as A.M. Best and Standard & Poor's, provide financial ratings on companies. In establishing their ratings, these companies perform an extensive quantitative and qualitative analysis of a surety company's ability to meet its contract obligations over the long term. Owners and contractors can obtain some confidence in the company's financial security by specifying that all companies issuing bonds on the project have a minimum rating in the given rating organization's "secure" range. Not all companies writing surety bonds will have a Best's or S&P rating. A second source of financial information on sureties is provided by the U.S. Treasury Department. Each year, the department publishes a list of surety companies that are approved for writing or reinsuring surety bonds in conjunction with federal contracts, which indicates an "underwriting limitation," the maximum dollar amount a surety may write on a single federal bond. Each company's underwriting limitation is determined by the Treasury Department based on financial and other data submitted by the surety during the approval process. Approved sureties can write bonds in excess of the underwriting limitation only if the excess is protected through a co-surety or reinsurance arrangement involving another approved surety company. The Treasury Department's list of approved sureties can be accessed on the Internet (http://www.fms.treas.gov/c570/index.html). The principal (contractor or subcontractor), not the obligee, purchases the bond and therefore decides which company to use. While owners and contractors can specify that sureties have minimum financial rating, they cannot usually specify that contractors provide a bond from a particular surety. They can, however, specify that the owner has the right to approve or veto the use of a surety.

Choosing a Surety Company

A contractor will develop a strong business relationship with a surety company. The surety company will help the contractor keep and increase its surety capacity. When choosing a surety company look for:

Surety’s reputation in the marketplace; Surety’s experience with your type of work; Easy and reliable access to representatives; Open communication and prompt feedback; Good relationships with producers; and Effective claims handling.

Personal Indemnity

Contractors may be asked by the underwriter to sign an indemnity agreement. This indemnity will be required of the contracting firm and may also be required of the firm's owners and their spouses. This means not only the company assets, but also personal assets are at risk.

http://www.fms.treas.gov/c570/index.html


The indemnity agreement obligates the named indemnitors to protect the surety from any loss or expense, thus assuring that they will stand fast in the face of problems and use their talents and financial resources to resolve any difficulties that may arise in the performance of the bonded work. After the bonds are written, the surety will continuously reevaluate the overall performance and financial position of the contractor. Adverse changes may cause the surety to reduce or terminate the bonding program, while positive results may serve as the basis for an increase in the amount of bonds available, and/or remove or reduce the need for personal indemnification.

Allow Sufficient Time

It is important to realize that sufficient time should be allowed when seeking bonds-especially for the first time. In no event should a bid be submitted for a bonded project before surety arrangements are in place. Doing so may cause the surety to conclude that the contractor acts imprudently, and does not exercise due care, responsibility, or reliability necessary to qualify for bonding.


SUBCONTRACT BONDS Performance and Payment bonds, required by general contractors from their subcontractors, guarantee that the subcontractor will faithfully perform the subcontract in accordance with its terms and will pay bills for labor and material incurred in the prosecution of the subcontracted work. In practically all construction and building operations three major parties are involved. The owner, general contractor and surety. However, a very important segment of the construction industry is the subcontractor. General contractors rarely do all the work required in the construction of a large job. They subcontract parts of the work to other contractors who are specialists in certain trades such as plumbing, heating, plastering, electric wiring, roofing, painting, landscaping, and other parts of the overall construction contract. The general contractor may or may not be familiar or does not have time or equipment and personnel to handle each part of his general contract. Some prime contractors maintain no equipment or organization of any depth and therefore subcontract the entire work to a number of subcontractors.

COVERAGE

There are two forms of Subcontract bonds available. One is Subcontract Performance Bond Form A, with the Subcontract Labor and Material Payment bond. The other is Subcontract Bond Form B, again with the Subcontract Labor and Material Payment bond (called "Short Form"). The Subcontract bond form usually contains the same provisions as those required of the prime contractor.

RATE AND PREMIUM

Subcontractors' bonds for mechanical or other work take regular manual rates according to class of work, contract price and stipulated time to complete involved under the subcontract.

UNDERWRITING The underwriting of Subcontract bonds often presents more difficulties than writing bonds for prime contractors. Although the bond furnished by the sub to the prime contractor presents the same underwriting problems as does the bond of the prime contractor to the owner, there are some additional ones, such as whether the sub will receive an adequate price for his work. This is normally difficult to determine because the prime contractor rarely discloses bids he has received from others. A subcontractor is more often than not awarded a contract without free and open competitive bidding. It is difficult therefore to determine how his price compares with others. It depends


largely upon the job itself. In fact, a person may be a general contractor on one job and a sub on another. With a few exceptions, the usual subcontractor is not called on to perform the work until possibly months after the start of construction and is therefore bidding for the future at current cost levels. All or a large part of the subcontracts may come to a peak at one time, presenting a financing problem. Labor and material costs can make or break any job, and delays and unfortunate staggering of subcontract work may run up overall costs, far beyond the initially estimated point.

IN EVENT OF LOSS

Under the Subcontract Performance bond, if the subcontractor, is declared to be in default the surety may promptly remedy the default. In that event the balance of the subcontractor price will be credited against the reasonable cost of completing performance of the subcontract. If completed by the owner, and the reasonable cost exceeds the balance of the subcontract price, the surety will pay to owner such excess, but in no event shall the liability of the surety exceed the amount of the bond. Under the Subcontract Labor and Material Payment bond the owner is not liable for the payment of any costs or expenses of a suit brought by a subcontractor claimant. No suit or action shall be commenced by any claimant:

After the expiration of one year following the date on which the principal ceased work on the subcontract;

Other than in a state court of competent jurisdiction in and for the county or other

political subdivision of the state in which the project is situated, or in the United States District Court for the district in which the project is located, and not elsewhere.

Subcontractor failure is a risk that cannot be entirely controlled, however due diligence can minimize the effects. In spite of all the best efforts, occasionally subcontractors default. The problems a subcontractor default causes:

Increased costs incurred to complete the subcontractor's work. These costs include a replacement sub, delay problems, and potential warranty claims. If the sub's price was unrealistically low to start, this problem will be amplified.

Unpaid second-tier subs and suppliers. The general contractor will be liable for unpaid bills from lien laws and /or payment bond statutes. It is a rare event when a default does not result in some double payment by the general contractor.

Many general subcontractors resist the suggestion of requiring performance and payment bonds from its major subs because of the added expense and perceived notion of double bonding. The possibility of subcontractor default is something over which the general contractor has limited control. The bond provides the general contractor with the same level of assurance


as that provided to the owner and more equitably shares the risk among those involved in the project.


Bid, Performance & Payment Bonds Required For Public Construction Projects

There are only two alternative methods of performing public construction. The government may perform the contract with its own forces or retain a private contractor to perform the construction contract. Virtually all of the public construction work in America is performed by private contractors. This work generally is awarded to the lowest responsible bidder through the open competitive sealed bid system. Surety bonds play a critical role in making the system work. In most cases, bid, performance and payment bonds are required by law on public construction projects. The Bid Bond is intended to keep frivolous bidders out of the bidding process by assuring that the successful bidder will enter into the contract and provide the required performance and payment bonds. If the lowest bidder fails to honor these commitments, the owner is protected, up to the amount of the bid bond, for the difference between the lowest bid and the next higher responsive bid. The Performance Bond secures the contractor's promise to perform the contract in accordance with its terms and conditions, at the agreed upon price, and within the time allowed. The Payment Bond protects certain laborers, material suppliers, and subcontractors against nonpayment. Since mechanic's liens cannot be placed against public property, the payment bond may be the only protection these claimants have if they are not paid for the goods and services they provide to the project. Slightly more than 100 years ago, the federal government became alarmed about the high failure rate among the private firms it was using to perform public construction projects. It discovered that the private contractor often was insolvent when the job was awarded, or became insolvent before the project was finished. Accordingly, the government was frequently left with unfinished projects, and the taxpayers were forced to cover the additional costs arising from the contractor's default. Since government property is not subject to mechanic's liens, the laborers, material suppliers and subcontractors were without remedy if they were not paid for their services. To protect itself and those who worked on its projects, the government tried using sureties. Congress passed the Heard Act to authorize the use of corporate surety bonds to secure privately performed federal construction contracts. In 1935, the Heard Act was replaced by the Miller Act, which is the current law requiring performance and payment bonds on federal construction projects. The use of corporate surety bonds makes it possible for the government to use private contractors for public construction projects under a competitive sealed bid, open competition system where the work is awarded to the lowest responsive bidder. Political influence is not a factor, the government is protected against financial loss if the contractor defaults, and certain laborers, material suppliers and subcontractors have a remedy if they are not paid, all without consequence to the taxpayer.


Types of Surety Bonds

Just as no one insurance policy provides all the various property or casualty insurance coverages, no one surety bond form is appropriate for all circumstances requiring a bond. Although there are many different types of surety bonds, they can be grouped into categories.

Contract Bonds

Guarantee the Fulfillment of Contractual Obligations. Contract bonds represent the largest premium volume of all surety bonds, and the largest volume of contract bonds written are those for the construction industry.

CONSTRUCTION CONTRACT BONDS Construction Contract bonds are those whereby the contractor--as principal, and the surety company--as surety, undertake that the contractor will perform his obligations under contract for the benefit of the owner--the obligee. There are several types of construction bonds as well. Bid, performance, and payment bonds are not intended to protect the contractors that have to post them. Instead, these bonds are intended to protect the owner of the construction project against contractor failure and to protect certain laborers, material suppliers, and subcontractors against nonpayment. The owner of a building (the obligee) under construction must know that the contractor(s) (the principal) doing the work will be able to finish the work on time and within budget. While no one can predict such things with certainty, contract bonds issued to the contractor by a corporate surety (the surety) help to ease the mind of the building owner.

Types of Construction Bonds Contractors typically are required to provide up to three types of bonds on a construction project. Bid bonds are commonly required of a general contractor in a competitive bid situation. Performance bonds and payment bonds are required on most federal projects and are common on many private projects as well. At the general contractor's discretion, performance and payment bonds may also be required of subcontractors. Each bond serves a specific purpose at some phase in the project, but the contractor provides all three bonds for the protection of another party (e.g., the owner or an upper-tier contractor). The bonds can be written as separate documents or combined into one or two documents.

Bond Forms


Standard bond forms are available from a number of sources. The most frequently used standard forms are the American Institute of Architects (AIA) forms. Bond forms are typically simple documents (two to three pages), relying extensively on the terms of the underlying construction contract to specify the contractor's obligations, which determine what events will trigger the bond. However, bonds do stipulate certain requirements for filing a claim under the bond, as these terms are part of the bond contract and not the underlying contract. The burden of complying with these notice requirements is on the party making the claim (the obligee). Texas requires all payment and performance bonds relating to public works, as well as payment bonds on private projects, to be issued on a statutory form, which references various Texas statutes in defining the obligations of the surety. (Unique among states, Texas also promulgates statutory bond rates that all sureties in Texas are required to use.) Many sureties have their own bond forms, but they tend to be similar to the standard AIA bond forms. (AIA document number A312 includes both a performance bond and a payment bond that can be issued separately or together as a single document.) Some contractors and owners have their own bond forms that they require all contractors to use. Sureties tend to be leery of private forms, however.

Underwriting Contract Bonds Whether a contractor has an occasional need for a contract bond or depends on contract surety as one of his/her "tools of the trade,” current information is essential Sureties and contractors alike place a high value on their relationship. A good surety underwriter can help contractors avoid bad business decisions by refusing to bond projects when the contractor is in danger of overextending itself or when a contractor tries to venture into a type of construction in which it does not have adequate expertise. Sureties make their money by writing bonds, so anything they can do to help make contractors better bonding risks should improve their own bottom line. The relationship between a surety and a contractor is more like a credit relationship than an insurance relationship. Bond applications are processed by the surety in much the same way as loan applications are processed by a bank. Unlike insurance policies, which are typically written on an annual basis, surety bonds are written on an as-needed basis as the contractor takes on new jobs. Therefore, surety underwriters need to keep their fingers on the pulse of a contractor's operations because each job adds new information that could affect the contractor's performance under any one of its open contracts. The surety's underwriting review will include evaluating the contractor's financial statements, current and past operations, management experience and stability, staff expertise, and many other factors. When issuing a bond, the bonding company is counting on the contractor to be able to finish the job. Bond underwriters look at the "three C’s" for any contractor -- character, capacity, and credit. A successful contractor must have all three.

1. Character: the contractor must be honest and possess a high degree of integrity.


Character refers to the contractor's track record and the general integrity of the owner and of management.

2. Capacity: the contractor must have the experience and knowledge to complete the job.

Capacity refers to the contractor's skill and experience in performing the size and type of work called for in the contract.

3. Capital: the contractor must have access to appropriate amounts of capital in order to

fully fund the project. Capital refers to the contractor's overall financial ability to take on the work under the terms of the contract

Based on its assessment of the contractor's overall situation, the surety will "prequalify" the contractor and institute a line of credit that establishes both the maximum penal sum it will write for the contractor on a single bond and the maximum aggregate limit for all bonds combined. Within the line of credit, the amount of underwriting on a bond may be minimal.

The principal Construction Contract bonds follow in sequence after Bid bonds have been posted and the lowest responsible bidder has been awarded the contract. First, the bond assuring performance of the contract, and the other guaranteeing payment of proper labor and material bills in connection with the work under contract.

HISTORICAL BACKGROUND

The Performance bond was the first Construction bond to be developed. In the course of time, provisions for the payment of labor and material furnished in the prosecution of the work were added to the contractor's and surety's responsibilities, either through a separate bond or as a part of the Construction Contract bond. The Performance bond is a relatively simple instrument. It covers whatever obligations the contractor assumes in the contract, in accordance with the plans and specifications that are part of the contract, for an agreed sum of money to be paid by the owner, whether public or private. The procedure of the Miller Act, enacted by the United States Congress in 1935, requires a separate Labor and Material Payment bond for Federal public works and building contracts, in addition to the Performance bond. Others require the labor and material payment obligation to be written into the Performance bond. On private construction work the dual bond procedure is customarily employed because the separate Payment bond minimizes the filing of labor and/or material liens against the owner's property, which might encumber the title to it.

COVERAGE

The form of a Contract bond rarely, if ever, spells out in detail the specific liability of the contractor and the surety. Instead, the obligations of the contract, the plans and specifications,


and often-pertinent statutes, are the controlling factors. Essentially, the bond provides that the surety company agrees to indemnify and reimburse the obligee for any loss suffered through failure of the principal faithfully to perform each and every obligation and duty imposed upon him by the contract. The bond continues in force until contract conditions have been fully completed and satisfied. The contract covered is usually made a part of the bond.

TYPES OF CONTRACT BONDS

Contract bonds fall into two categories--statutory, and non-statutory or private. Bonds given pursuant to law are called statutory. This means that the bond is one required or permitted by a law or ordinance, or a regulation having the force of a law. Statutes frequently prescribe the conditions and coverage of such bonds. Private construction, on the other hand, is bonded generally pursuant to private contractual provisions. Instances of statutory bonds are Standard Form 25 of Performance bond and Standard Form 25-A of Payment bond, both for Federal construction (October, 1983 edition, General Services Administration). Private Construction Contract bonds have gone through a sequence of changes because of economic conditions, public demand, and the realization of surety groups and the American Institute of Architects that outmoded forms of non- statutory Contract bonds should be updated. The AIA as of December, 1984, modernized the forms of non-statutory Bid, Performance and Payment bonds. The AIA Bid bond is numbered A310, and the Performance and Payment bonds are jointly numbered A312. While there is no standard form of private Construction Contract bond, the AIA form A312 is a step toward standardization and it is generally used for private contracts, and for public contracts where a statutory form is not prescribed. A Construction Contract bond, while protecting the owner against loss, is not a substitute for a contractor's integrity, financial worth, experience, equipment or personnel. Nor is the bond an independent undertaking by the surety so long as the contractor is performing in accordance with the terms of the contract. While the liability of the contractor may theoretically be unlimited, that of the surety which bonds him is limited to a certain sum of money called the "penalty" or the "penal sum" which is set out in the bond.

These instruments guarantee the fulfillment of contract obligations. These contracts can involve both construction and other type of work or service required by public or privately-owned entities. Five such bonds fall into this class and are described thus in the manual of the Surety Association of America (SAA):

Bid or proposal bond A bid bond is commonly required in competitive bid situations. Submitted with the bid, the bid bond guarantees that if the contractor is awarded the job, it will agree to perform the work at the price quoted and will provide additional bonds as required by the construction contract. If the contractor declines to enter into a contract to perform the work at the agreed-upon price, the bid bond will reimburse the obligee (owner or upper-tier contractor) the difference between the defaulting contractor's bid and the next lowest bid, up to the bid bond penal amount.


This guarantees an owner (obligee) that a party bidding for a contract will, if the bid is accepted, enter into a contract and furnish the other necessary bonds. These include performance, payment, and maintenance bonds for carrying out the work. If the contractor fails to perform these tasks, the bid bond pays the obligee the difference between the defaulting party’s bid and the next lowest bid.

FUNCTION

A Bid bond does not assure the owner that he will get his building or construction project for the contract price. That is the function of the Performance and Payment bonds. The surety's maximum liability, however, is limited to the penalty of the Bid bond. Practically all public work is awarded to the lowest responsible bidder. The amount of the bid security and its form for other public work may be specified by law or regulation. For private work, the form of Bid bond customarily used is that developed by the American Institute of Architects. Usually the bid security is 10% of the amount of the bid. Bid bonds are written as a percentage of the amount bid, percentages ranging from 5 to 20 percent. The bid bond's promise extends only to the contract terms at the time the bond is issued.

UNDERWRITING Bid bonds must be handled with the same care and caution as final bonds. The Bid bond involves exactly the same underwriting as the Contract bond itself. The same form of application is used for the Bid bond as for the Construction bond, and the same information must be supplied. Arrangements for the Bid bond should be made well in advance so that the company may have sufficient time to research the application. Companies generally follow the practice of authorizing a Bid bond only after the Performance bond on the project has been underwritten and approved, so there have been relatively few defaults under Bid bonds.

RATE AND PREMIUM

The premium for a bid bond is fully earned by submission of the bid or proposal, whether successful or not. If a contract is awarded on a bid the premium for the final bonds is computed at the regular rate and the change on the Bid bond is usually applied thereto. Premiums vary from $25 to $100.

BID BOND SERVICE UNDERTAKING Contractors customarily obtain required bonds from the same company. In consideration of this relationship the company will normally supply as many Bid bonds during the period of a year as the contractor requires. A new bond is executed for each bid but no further charge is made. Premium is charged for the necessary final bond when a bid is accepted. The bid bond service undertaking is an agreement whereby all Bid bonds required by one contractor from one bonding company during a twelve month period may be written for the initial


charge. This charge is fully earned, whether or not the contractor secures any Performance bonds during that period. The agreement does not require the contractor to place all Bid bonds during the year with one bonding company, and the company is not obligated to furnish the bonds, although as a matter of practice the company would issue such bonds to contractors for whom they have insured bid bonds.

ALTERNATIVE TO CASH DEPOSIT

Most contractors, as a matter of convenience, prefer to use their credit in the form of a Bid bond rather than their cash or a certified check. The procedure eliminates the need to tie up cash or certified checks on a number of bids outstanding at one time.

EXCLUSIONS AND LIMITATIONS

A bid bond service undertaking does not include any Bid bond in connection with any project on which a Performance bond is not required, the U.S. Mails, or annual bonds.

CONDITIONS

Nothing in a Bid bond service undertaking alters or modifies the terms and conditions of any agreement entered into between the contractor and the bonding company. This includes joint venture applications, indemnity agreements, and subordination agreements. The policy period is one year. Cancellation is not a factor because bids are dealt with separately and the contractor is not obliged to apply for bonds nor is the company obliged to execute them under adverse circumstances.

ACCEPTABILITY

Any contractor with good experience for whom a surety has previously executed bonds is a desirable prospect for a Bid bond service undertaking. The procedure promotes a long-term business relationship based on mutual confidence. The contractor is assured of quick service in the execution of Bid bonds when the company has already established his capability and financial capacity. The surety will of course have a second look at a new contractor making an initial bid. Once a good relationship is fostered, however, the contractor will obtain all necessary bonds (and other insurance) from the company, which has provided him with a Bid bond service undertaking. It follows that the insurance of a Bid bond service undertaking by a recognized surety company is an excellent endorsement of the contractor.

RATE AND PREMIUM


The premium charge for a Bid bond service undertaking, which includes the execution of the initial Bid bond and other Bid bonds that may be subsequently approved, is usually $50. This charge covers a period of one year from the date stated in the undertaking and it is fully earned. A continuous bond may be written for a flat charge of $100.

SAMPLE BID BOND -- Construction or Supply

THE CONDITIONS OF THIS OBLIGATION ARE SUCH that, if any awards made within 60 days from the date of this instrument, by said Obligee, to the above Principal under a public invitation for [description of project] shall be accepted by said Principal and said Principal shall enter into a contract for the completion of said work, and give Bond with the [name of the surety company] as surety, or with other surety or sureties to be approved by the Obligee for the faithful performance thereof, then this obligation shall be null and void; otherwise to remain in full force and effect.

PROVIDED: First -- That the liability of the Surety shall in no event exceed the penalty of this bond.

Second -- That any suits at law or proceedings in equity brought or to be brought against said Surety to recover any claim hereunder, must be instituted within 6 months from the date of this instrument.

A contractor submits a bid bond along with his or her bid on a particular job. The bond guarantees that, if awarded the job, the contractor will sign the contract. It also guarantees that the contractor will furnish all necessary performance and payment bonds. If the contractor defaults, the surety must pay the difference between this contractor’s bid and the next higher one. The surety’s liability is limited to the bond penalty (the limit of liability). The bond sets a six-month time limit for suits against the surety. An alternative to the bid bond is the "bid letter.” Sometimes required on public (government) projects, this is a letter signed by the surety. In the letter, the surety agrees to execute the bidder’s obligation in an amount equal to the amount upon which the project award was based. Because no penalty is specified, there is no limit on what the surety may end up paying.

Performance bond A performance bond guarantees that the contractor will perform the work in accordance with the construction contract and related documents, thus protecting the owner from financial loss up to the bond limit (called the penal sum) in the event the contractor fails to fulfill its contractual obligations. The AIA performance bond language is reproduced below as an example of the bond agreement.


SAMPLE PERFORMANCE BOND AGREEMENT

1. The Contractor and the Surety, jointly and severally, bind themselves, their heirs, administrators, executors, successors and assigns to the Owner for the performance of the Construction Contract, which is incorporated herein by reference.

2. If the Contractor performs the Construction Contract, the Surety and the Contractor shall have no obligation under this Bond, except to participate in conferences as provided in Subparagraph 3.1.

3. ...

4. When the Owner has satisfied the conditions of Paragraph 3, the Surety shall promptly and at the Surety's expense take one of the following actions.

4.1 Arrange for the Contractor, with consent of the Owner, to perform and complete the Construction Contract; or

4.2 Undertake to perform and complete the Construction Contract itself, through its agents or through independent contractors; or

4.3 Obtain bids or negotiated proposals from qualified contractors acceptable to the Owner for a contract for performance and completion of the Construction Contract, arrange for a contract to be prepared for execution by the Owner and the contractor selected with the Owner's concurrence ... and pay to the Owner the amount of damages as described in Paragraph 6 in excess of the balance of the Contract Price incurred by the Owner resulting from the Contractor's default; or

4.4 Waive its right to perform and complete, arrange for completion, or obtain a new contractor and with reasonable promptness under the circumstances:

.1 After investigation, determine the amount for which it may be liable to the Owner and, as soon as practicable after the amount is determined, tender payment therefor to the Owner; or

.2 Deny liability in whole or in part and notify the Owner citing reasons therefor.

Source: American Institute of Architects, Performance Bond, Document A312, December 1984 edition.

As paragraph 4 of the AIA A312 demonstrates, when a contractor defaults in its performance of the contract, the surety has several options in how it responds. If the contractor is suffering from temporary financial problems, such as a cash shortage, the surety can provide the necessary funds to keep the contractor afloat and complete the work. Alternatively, the surety can hire another contractor to complete the work. The final two options are to simply pay the obligee (owner or upper tier contractor) an amount equal to the surety's liability under the bond


or to deny the obligee's claim entirely. If the obligee failed to meet its notice requirements, the surety may deny the claim on those grounds. Some bonds are more specific in defining what types of costs the surety is liable for in the event of a default. The AIA A312 provides that, in addition to completing the work called for in the contract, the Surety's obligations include the cost of correcting defective work; additional legal, design, and delay costs resulting from the contractor's default or the surety's failure to act promptly in accordance with paragraph 4; and liquidated or actual damages caused by the contractor's delay in performing or failure to perform its contractual obligations. The laws of suretyship place some limitations on the surety's obligations under the bond. Most notably, if the contractor's default is predicated by the owner's failure to pay the contractor for completed work, the surety is not obligated to pay the owner's claim under the bond. This guarantees the owner that work will be completed according to the contract specifications. A performance bond is the key bond in a work project because the owner of a project not only wants the work completed -- usually within a specified time -- but also completed according to specifications. If either or both of those promises are not fulfilled by the principal, the surety is obligated to satisfy the owner.

PERFORMANCE BOND for General Contractors

NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such, that, if Contractor shall promptly and faithfully perform said contract, then this obligation shall be null and void; otherwise it shall remain in full force and effect.

The Surety hereby waives notice of any alteration or extension of time made by the Owner.

Whenever Contractor shall be, and declared by Owner to be in default under the Contract, the Owner having performed owner’s obligations thereunder, the Surety may promptly remedy the default, or shall promptly:

1) Complete the Contract in accordance with its terms and conditions, or

2) Obtain a bid or bids for submission to Owner for completing the Contract in accordance with its terms and conditions, and upon determination by Owner and Surety of the lowest responsible bidder, arrange for a contract between such bidder and Owner, and make available as work progresses (even though there should be a default or a succession of defaults under the contract or contracts of completion arranged under this paragraph) sufficient funds to pay the cost of completion less the balance of the contract price; but not exceeding, including other costs and damages for which the Surety may be liable hereunder, the amount set forth in the first paragraph hereof. The term ’balance of the contract price’ as used in this paragraph, shall mean the total amount payable by Owner to Contractor under the Contract and any amendments thereto, less the amount properly paid by Owner to Contractor.

Any suit under this bond must be instituted before the expiration of two years from the date on which final payment under the contract falls due.

No right of action shall accrue on this bond to or for the use of any person or corporation other than the owner named herein or the heirs, executors, administrators, or successors of Owner.


Under the form, the project owner must live up to his or her obligation to pay the contractor. If the project owner does not meet this responsibility, neither the contractor nor the surety has any further obligation to complete the project.

Payment bond A Labor and Material Payment bond guarantees that payment will be made for work done and materials supplied in connection with a construction project under contract. The general contractor is responsible for contracting for all materials and labor needed for the project, and for paying for such materials and labor in accordance with the contract provisions. The payment bond guarantees that suppliers and subcontractors will in fact be paid for materials and labor furnished to the contractor. The ultimate purpose of the payment bond is to guarantee the owner delivery of a project that is free of liens. Payment bonds also protect lower-tier contractors and suppliers from attempts by general contractors to improve their own cash flow by delaying payments to suppliers and subcontractors. (These lower-tier parties must comply with "notice of last furnishing" or similar notification clauses to preserve their payment bond rights.) Payment bonds carry a penal sum (bond limit) that normally ranges from 50 to 100 percent of the contract value. On federal projects subject to the Miller Act, the payment bond is governed by the terms of the act. (As of 1999, payment bonds equal to the full contract price are required on all projects subject to the Miller Act.) Most states also have what are referred to as "little Miller Acts" that require payment bonds on public works.

______ STATUTORY PAYMENT BOND (PUBLIC WORKS) AGREEMENT

KNOW ALL MEN BY THESE PRESENTS, that [Principal] and [Surety] are held firmly bound unto [Obligee] in the amount of __________ Dollars ($_________) for the payment whereof, the said Principal and Surety bind themselves, and their heirs, administrators, executors, successors and assigns, jointly and severally, firmly by these presents. Whereas the Principal has entered into a certain written contract with the Obligee, dated _______, which contract is hereby referred to and made a part of hereof as fully and to the same extent as if copied at length herein. NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH, that if the said Principal shall pay all claimants supplying labor and material to him or a subcontractor in the prosecution of the work provided for in said contract, then this obligation shall be null and void; otherwise to remain in full force and effect. PROVIDED, HOWEVER, that this bond is executed pursuant to the provisions of Chapter 2253 of the Texas Government Code and all liabilities on this bond shall be determine din accordance


with the provisions, conditions and limitations of said Chapter to the same extent as if it were copied at length herein.

This bond, also referred to as a "labor and materials" bond, guarantees that bills for labor and materials used in the work project will be paid as they become due. This coverage is usually automatically included in the performance bond at no additional charge. But, if this bond is written wholly apart from the performance bond, there is an additional charge.

COVERAGE

The Payment bond is required to be in an amount ordinarily adequate to protect all claimants. Each claimant has the right to maintain a separate suit on the Payment bond at any time commencing 90 days subsequent to the date on which he furnished the last of the labor or material for which claim is made, terminating one year after the date on which the last of the labor was performed or material was supplied by him. The owner is not liable for any costs or expenses of such a suit.

IN EVENT OF LOSS

Suit may be commenced by a claimant provided that notice has been given to any two of the following--the principal, owner or surety--within 90 days after labor was performed or material furnished. Notice must be given by registered or certified mail, or by legal process, and must include full details. Most bonds provide that no claim may be brought after one year from the date the principal has ceased work on the contract. Suit must be brought in a state court of competent jurisdiction or in the United States District Court for that district.

BOND PERIOD

The bond period is the duration of the contract that is made a part of the bond.

UNDERWRITING The surety must be satisfied that the contractor is honest and reliable; is experienced in the line of work for which the bond is required; is not overloaded with other work; has no losing contract on hand; has obtained the contract to be bonded at a good price; has ample plant and equipment or funds with which to purchase needed items without impairing his working capital; enjoys a credit standing with banks and materialmen; and has or can make proper arrangements for financing his work and has sufficient net liquid assets readily convertible into cash to enable him to stand any reasonable loss that might be sustained in carrying out his contract.

PROCEDURE

The application for a Labor and Material Payment bond or for a Construction Contract bond, if the former is an integral part of the latter, must be fully completed. A copy of the contract, the


specifications and drawings, and a financial statement completed on a company form must accompany the application for the bond. When the application is accepted all appropriate lines should be filled in, e.g., names of contractor, surety and owner, and the amount for which the bond is to be issued. The contractor signs the bond in the presence of a representative of the surety.

This bond inserted for its interest. On private work in [state] the original of this bond is filed with the county clerk in the jurisdiction where the work is being performed. Bond provides payment only -- not performance -- to all lienors supplying labor, material, and supplies used directly or indirectly by Principal in the prosecution of the work provided in the contract, and pay the owner for all loss, damage, expenses, costs and attorney’s fees, including appellate proceedings that owner sustains because of default by the Principal under the contract. . .

THE CONDITION OF THIS BOND is that if Principal:

1. Promptly makes payments to all lienors supplying labor, material, and supplies used directly or indirectly by Principal in the prosecution of the work provided in the contract dated ______________ between Principal and Owner for construction of _______________, the contract being made a part of this bond by reference, and

2. Pays Owner all loss, damage, expenses, costs, and attorney’s fees, including appellate proceedings, that Owner sustains because of default by Principal under paragraph 1 or this bond; then this bond is void; otherwise, it remains in full force.

Any changes in or under the contract documents and compliance or noncompliance with formalities connected with the contract or with the changes do not affect Surety’s obligation under this bond.

A payment bond is for the benefit of those supplying labor and materials to a construction project. It agrees to indemnify the owner for any loss sustained because the principal does not pay his or her suppliers. The provisions of a payment bond are usually included in the performance bond. If a payment bond is written separately from a performance bond, there is no charge for the payment bond. The term "labor" is self-evident. "Material" is construed as necessary supplies to complete the work, as well as water, gas, power, light, heat, oil, gasoline, telephone service or rental of equipment directly applicable to the contract.

Maintenance bond This bond carries the guarantee that faulty work of the principal will be corrected or defective materials will be replaced. A performance bond sometimes includes this maintenance guarantee for a period of one year without additional charge.


WHEREAS, the Principal and the Obligee entered into a written contract on [date] for the [description of the project], all in accordance with Item No. ____ of the plans and specifications and drawn up by ____, and

WHEREAS, said contract provides that the Principal will furnish a bond in the penalty of (5%) of the contract price conditioned to guarantee, for the period of (one) year(s) after approval of the final estimate on said job, by the owner, against all defects in workmanship and materials which may become apparent during said period, and

WHEREAS, the said contract has been completed, and was approved on [date];

NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH that, if the Principal shall indemnify the Obligee for all loss that the Obligee may sustain by reason of any defective materials or workmanship which become apparent during the period of (one) year(s) from and after [date]/

Completion bond This bond covers contracts that involve financing or design hazards. It is written in favor of a lender or lessor and guarantees completion of a building or improvement. It is also used where a contractor is responsible for the financing or the design of the contract.

WHEREAS, the Principal and Obligee have entered into a written agreement dated ___________, copy of which is or may be attached hereto, but the terms of which the Obligee agrees to lend the Principal the sum of $_____, to be used wholly for the construction of __________ located on Lot(s) ______________, in accordance with the plans and specifications therefor, approved and signed by the Principal and Obligee, and in accordance with the conditions and covenants of such agreement, and

WHEREAS, in consideration thereof, the Principal has executed and delivered to the Obligee his mortgage on said property described above, accompanied by his note, in the sum of $_____, as security for said construction loan.

NOW, THEREFORE, the condition of this obligation is such that, if the Principal shall well and truly perform and fulfill all the covenants and conditions of the aforesaid agreement, and shall promptly erect and construct the said __________ according to the above mentioned plans and specifications, at or within the time required, and shall save and keep harmless the Obligee, and the above property, from any and all liens and claims for labor, materials, or otherwise, arising out of or incurred by reason of the construction and erection of the said ________, and shall turn over said property to the Obligee free and clear of all such liens and claims.

When a contractor receives a loan to complete a construction project, the lender often requires a completion bond. Such a bond guarantees to the lender that the project will be completed without any liens against the property. This should not be confused with a Performance bond


given by the contractor to the owner guaranteeing faithful performance of the building or construction contract. Sureties do not regard this bond with high favor. While the same surety may provide both the contractor’s performance bond and the completion bond, such a procedure is usually not recommended. If the surety must pay money to the obligee, the surety may then go back against the principal to collect whatever is possible. However, if the same surety provides both bonds, it has no recourse against the principal.

EXCLUSIONS AND LIMITATIONS

Although Contract bond forms vary, the following exclusions are common to those used by many surety companies:

Loss or damage resulting from an Act of God, mob riot, civil commotion, public enemy, strikes or labor difficulties

Injury to or death of persons, accidents, fire, lightning, tornado, flood, earthquake,

cyclone, or defect in the plans and specifications referred to in the contract

Reconstruction or repair work, material damaged or destroyed from such causes or for loss or damage due to delay occasioned thereby

An amount in excess of the bond

Guarantees of efficiency or wearing qualities

IN EVENT OF LOSS

The obligee must notify the surety immediately or within a time specified in the bond of any act or omission by the principal or his agents or employees that may involve loss for which the surety may be liable. If the principal abandons a contract or is compelled to cease operations, the surety has the right to complete the contract in accordance with its terms and conditions, or to obtain a bid or bids for submission to the owner for completing the contract. Upon determination by owner and surety of the lowest responsible bidder, the surety will then arrange for a contract between the two and make available as work progresses sufficient funds to pay the cost of completion less the balance of the contract price. If the cost of completion exceeds the balance, the excess will represent the owner's loss resulting from the contractor's default, and will be payable by the surety to the owner in fulfillment of its obligation under the bond. Any suit under the bond must be instituted before the expiration of two years from the date on which final payment under the contract falls due.

BOND PERIOD

The bond period is the duration of the contract that is made a part of the bond.


UNDERWRITING Construction is the leading industry in the United States, surpassing even agriculture, and the chances of failure on the part of contractors spread out over a vast area are not minor. The Construction Contract bond field is the largest of the surety business. Net premiums are in large volume and so, understandably, are losses. In the application for the bond, the contractor agrees with the surety that in the event of failure to perform the contract and carry out all obligations thereunder, he will indemnify the surety for any loss or expense caused by such failure. However, when the contractor becomes bankrupt or his financial resources are inadequate to enable him to indemnify the surety, obviously the loss factor in the surety business becomes definitely more factual than potential. Underwriting of Contract bonds calls for a considerable degree of skill and experience. There are, to begin with, ten major factors of paramount interest to the underwriter:

Experience, ability, and integrity of the contractor

Financial resources and progress

Credit standing

Character and extent of the work to perform

Incomplete work on hand

Adequacy of the contract price; terms of the contract and of the bond

Amount of work to be subcontracted and to whom

Sufficiency of the plant and equipment

Adequacy of the contractor's insurance program The bond does not impose on the surety any obligations separate or distinct from or additional to those assumed by the contractor. Under the bond the principal is primarily responsible, and every obligation of the surety is that of the principal. In order to operate successfully, the surety must carefully consider the qualifications of the contractor before executing a bond and in so doing it performs a valuable service in screening out contractors not qualified. Some problems face the Contract bond underwriter in an analysis of financial statements from contractors. All underwriters request statements with unqualified certifications from Certified Public Accountants. It is true that in many instances they must be content with statements prepared by the CPA taken from the contractor's books and records without verification, but since all items must thereupon be verified by the underwriter, delays understandably result before the surety is equipped to authorize credit. Because of the long-term nature of many contracts and the inherent hazards of the construction industry, contractors have adopted two methods of accounting, both of which are acceptable. These methods are:

The completed contract method, whereby income on contracts is recognized when contracts are substantially completed; and

The percentage-of-completion method, whereby income on contracts is recognized as

the work progresses.


A third method is used by some contractors--the cash basis--under which income and

expenses are recognized only to the extent that cash is actually received or disbursed. Contractors' financial statements prepared on this basis are worthless from the underwriter's viewpoint.

The three types of contracts requiring bonds are: construction contracts; supply contracts; and miscellaneous contracts.

Class B contracts involve building construction and related subtrades, and cover the most difficult work to be done on a construction job. They include engineering, construction, concrete, and excavation work. Class B contracts also cover underground and underwater construction.

Class A contracts cover work that is not as difficult as Class B. Such work includes

earthmoving of a non-excavation nature and glazing contracts.

Class A-1 contracts generally include construction work that is not as difficult as classes A or B. Class A-1 also covers contracts for the furnishing or installing of various equipment or services. The SAA manual says that these contracts are "scientific, technical, or data processing" in nature and provide for the "furnishing of personnel or facilities" to the obligee.

The coverage of a contract bond is usually prescribed by the obligee or statute. If a bond is written "in conformance with terms" of a statute, then it carries whatever liability the statute requires.


MISCELLANEOUS CONTRACT BONDS There are a number of classes of contracts, other than construction contracts, in connection with which surety bonds may be required.

SUPPLY CONTRACT BOND In addition to Supply Contract bonds, they include those for garbage and ash removal, for carrying United States mail, and for demolition or wrecking contracts. The rate manual contains a broad listing of such miscellaneous Contract bonds. Supply contracts are those for supplies and materials which do not become part of the realty, or attached thereto, until after the contract is completed. The bond is similar to the Construction Contract bond and it guarantees fulfillment of a contract to furnish specified supplies or materials according to terms stated. It is used for both public and private bodies. Bid and Performance bonds are usually required in connection with delivery of such supplies to public bodies. The surety on the bond agrees to indemnify the obligee for any loss he might suffer through failure of the principal to carry out faithfully his contract.

RATE AND PREMIUM

So varied are the rate tables that it is necessary to refer to the Construction Contract bond rate pages in the manual, according to type of project, for specific rates. Rates are quoted per thousand, subject to minimum premiums. Construction contracts are divided into three general classes. The best way to determine in which class a contract belongs is to study the lists shown in the manual under the three classes. The rates for Class A-1 are the lowest, with Class A the next higher. Class B contracts involve the more complicated and hazardous work and these take the highest rates. The measure of the hazard is the amount of work to be done, and consequently the rates apply to the contract amount, not to the bond amount. The exception is where the bond amount is less than 20% of the contract price. In such cases, the rate is based on the amount of the bond and is considerably higher. The contract price is subject to variation since it is next to impossible to design a building or plan any kind of project so that there will be no changes of any sort as the work progresses. The surety, therefore, when the job has been finally completed and accepted, ascertains the actual costs and readjusts the premium. If there is an overrun, the contractor pays the additional premium. If the actual amount received is less than the amount on which the original premium was charged, the surety returns the overcharge. The premium on most Contract bonds is the charge for any period up to 24 months from the date of the bond. If the work continues for a longer period, there will be an additional charge.


The rate for Class A-1 contracts is for a term of two years or less. If the bond continues in effect after that date, an annual renewal premium is chargeable, based on the amount of the unfinished contract. The rates for Class A and Class B contracts are based on the "stipulated time for completion," which is determined at the time the bond is executed. There is no renewal premium chargeable, even though the contract is not completed within the stipulated time. If a contract calls for maintenance, the base rate includes a maintenance guarantee period up to 12 months from the date of completion. If the work is to be guaranteed beyond that period, there is a separate maintenance premium chargeable. If the contract provides an advance of money to the contractor, an additional premium based on the amount advanced also is chargeable. Special rate treatment is accorded special classes of Contract bonds, the rules for which are set forth in the manual under each classification. These rules, however, are not uniform. In any event, an agent involved in Contract bond preliminaries should discuss premium charges with either the fieldman or the underwriter before quoting. Large general contractors have developed what is termed the joint venture to pool financial resources and skills for certain construction contracts which normally would be too much for the individual contractors to handle within their respective organizations, thereby cutting down the overall expense. Many of the huge construction jobs throughout the United States have been made possible because of such pooling of experience, equipment, and manpower. The investment by a contractor in a joint venture should be set forth separately in his financial statement when it is considered material. Further information should include his share of joint venture earnings and a summary of the venture assets, liabilities and operations. This information is important since a contractor participating in a joint venture will share in the loss as well as the profit up to the extent of his participation. Failure to account properly for joint venture operations could adversely affect a contractor's financial position without the immediate knowledge of the Contract bond underwriter.


LICENSE AND PERMIT BONDS These bonds are required of those who must obtain licenses or permits from cities, towns, or political subdivisions before they can proceed with various activities. These bonds, although used for a variety of purposes, usually guarantee that the persons who post them will comply with statutes, regulations or ordinances that regulate their activities. Electricians and plumbers also must post these bonds guaranteeing that their work will conform to the specifications of a given building code. There are two broad classifications of license and permit bonds:

Those that indemnify a governmental body for the principal’s failure to comply with an applicable law.

Those that give a third party the right to pursue the principal -- in the third party’s own

name -- for loss or damage incurred by that third party due to the default of the principal.

Guarantee Compliance with Various Ordinances

Many business enterprises are required to obtain licenses from their municipality, county or state before they may conduct all or a part of their activities. Closely related is the granting of a permit to do a specific job, notably of a construction nature. Anyone who must obtain a license or permit from a political subdivision in order to conduct business, usually needs a license and permit bond. These bonds guarantee to the governmental unit that the holder of the bond will comply will all regulations on their particular activity. Licenses and permits are required when the public interest could be affected adversely in the practices of many kinds of businesses. Laws, ordinances, and regulations have been established to insure that such practices are properly carried on in the public interest.

COVERAGE License and Permit bonds divide into two broad categories: Those providing for payment to the governmental unit in case of default, and those providing direct recovery by third parties. The first classification guarantees payment to the government if the person or firm bonded fails to comply with the law, pay fees or taxes or otherwise meet his obligations to the government. Bonds for each type of undertaking required to obtain licenses or permits must follow standard forms approved by the issuing authority. Most License bonds are simple in form and are written in clear-cut though general terms. The Principal and the Surety are firmly bound to the municipality or other unit for a specified sum. Conditions of the obligation include a statement that the governmental unit is about to issue a license to the applicant for a stated term to carry on a specified business under and in accordance with the provisions of the ordinances and regulations of the city.


The bond provides that if the Principal shall faithfully discharge his duties as outlined in pertinent ordinances, rules and regulations and shall pay the owner of any property for loss arising from work done in violation of any ordinance, the obligation is void. Otherwise, the Surety is required to pay the sum for which it is held bound. The applicant is fully informed of the regulations pertaining to his business when the license is issued. Surety companies have complete records of all laws, regulations and ordinances that are pertinent. The second group of License and Permit bonds consists of those extended to give third parties a right of action in their own name. They provide for recovery by members of the public for loss or damage resulting from breach of obligations by the Principal. Such obligations arise from the law, ordinance, or regulation under which the bond is required.

REQUIRED OF INSURED

License and Permit bonds are issued only upon submission of carefully completed applications, blanks for which are furnished by the Surety company. Short applications are used for most bonds except those that are extended to give a third party the right to sue the Surety. Basic information which an applicant must furnish for a License or Permit bond includes: Name of applicant; address; nature of license; amount and date of bond; to whom bond is given; how long engaged in business to which license relates; and net worth over and above all liabilities. Complete information regarding Liability insurance carried by the applicant must be supplied when a bond is extended to include the right of a third party to sue the Surety. Type of coverage, name of carrier, policy number, and term are required information. Special forms are used for certain License and Permit bonds and for permits of an unusual nature, such as blasting and other hazardous contracting operations.

MISCELLANEOUS

A license or permit bond carries a term that corresponds with the period covered by the license or permit issued to the principal. The right to file a claim under the bond continues for varying periods, depending upon the state in which it was issued. Termination of a license or permit bond depends upon the following:

Whether or not termination is allowed by law;

The ordinance under which the bond is required;

The terms of the bond itself. Term for which a License or Permit bond is written must correspond to the period for which the license or permit is granted by the governing body. Many types of bonds are required annually; others, for a short period in connection with a special privilege. In most communities, electricians, plumbers, and others file bonds annually. Building and road contractors frequently file license bonds for special types of work, as street obstruction, blasting operations, etc. State


laws specify the period after a bond has been terminated during which a claim may be filed for a loss occurring during the term of the bond. Cancellation rules are not included in standard bond forms. Whether or not the Surety may terminate a License or Permit bond depends on the law, ordinance, or regulation under which the bond is required. When a bond is canceled and not followed by a successory bond, the premium is fully earned. When a bond is terminated after six months and is followed by a successory bond, a pro rata return is allowed. Between three and six months, a return of 50% of the annual premium is allowed. A return of 75% of the annual premium is allowed for termination within three months of a bond followed by a successory bond.

UNDERWRITING Hundreds of License and Permit bonds are specifically listed and rated in the Bond manual, but there are many more than that. New forms of such bonds come into being at practically every meeting of state legislatures and subordinate legislative and regulatory bodies. The coverage may be grouped into three general classifications:

Code Observance and Good Behavior bonds, such as those for plumbers, electricians, drain layers and retail liquor dispensers. These bonds guarantee the principals compliance with applicable health or safety laws or regulations. They are the most freely written because they do not primarily guarantee the payment of money and are the least hazardous.

Tax or Money Remittance bonds, such as gasoline tax bonds, most Federal liquor,

beer and wine bonds, milk dealer, and commission merchant bonds. These bonds guarantee payment by the principal of money due to others and are considered financial guarantees. Their writing should be restricted to experienced and financially responsible applicants.

Property Damage and Personal Injury bonds, such as blasting bonds, permit bonds

for hauling or storing explosives; fireworks displays and certain motor vehicle bonds are in this category. The applicant must be experienced and financially responsible. Underlying or excess insurance coverage is generally required as a safeguard.

RATES AND PREMIUMS

Rates and premiums for License and Permit bonds are determined from the bond manual and are quoted per $1,000 per year, subject to a minimum annual premium. Annual minimum premium is $100. There are also two types of U.S. government bonds that fall within this category: excise tax and custom bonds. Excise tax bonds protect public revenues. They assure that the principal will comply with all laws and regulations regarding payment of taxes, fines, or other charges due the government.


Sometimes the bond is payable in full if the principal does not comply with a certain law. Some excise tax bonds allow the principal to defer payment of excise taxes for a given period after products have been withdrawn from bonded premises. Excise tax bonds may cover just a single shipment or transaction. At other times they cover the operation of a business, such as a license to operate a distillery. These bonds may typically be cancelled by the surety with anywhere from a 10 to a 90-day notice. The United States Customs Service has developed one standardized bond, Customs Bond Form 301, which covers most customs’ transactions. Form 301 can be used to cover either a single entry or shipment or a series of such on a continuous basis. These bonds assure that the principal will pay all duties, taxes, etc. that are assessed against the principal. They also guarantee that the principal will return any goods to their country of origin if the U.S. Customs Service determines that the goods were illegally imported. Finally, these bonds guarantee that the principal will comply with all U.S. laws governing the importation of goods. When covering a single shipment, Customs Bond Form 301 is non-cancelable. If it is written on a continuous basis, form 301 may be canceled by the surety with a 30-day written notice.

NOTARY PUBLIC BOND Covers loss to the obligee (the State by which the bonded Notary is commissioned) and loss or damage to third persons, resulting from the failure of the principal to faithfully perform the duties of a Notary Public. Duties of a Notary and his or her obligations are specified in statutes of the State in which appointed. A commission is generally effective for four years and the required bond is issued for the same term. The bond penalty is usually $5,000 and is prescribed by statute.

COVERAGE

A Notary bond is a faithful performance of duty bond. It provides redress up to the bond penalty to a person injured by improper performance of the Notary's duties through the instrument of the State (the obligee). Every Notary has the power, as set forth by statute:

To do all acts which, by common law and custom of merchants, they are authorized to do

To take and certify all acknowledgments of deeds or other instruments of writing required or authorized by law to be acknowledged

To administer oaths generally and to take and certify affidavits and depositions

PENALTIES

The powers of a Notary derive from the State by which appointed and whatever penalties that may be assessed against the notary for improper acts are according to statute. Representative penalties are as follows:


Acting after expiration of term. If done knowingly, a fine from $25 to $500

Failure to explain instrument. If the signer of a document did so with a mark or if the Notary otherwise had good cause to believe the contents were not understood by the signer, the Notary may be fined from $5 to $500 and be imprisoned by the county for from 10 days to six months

False attestation of instruments (affidavits or acknowledgments). On conviction the Notary may be imprisoned by the State for not less than one year and not more than three years and may be fined from $10 to $1,000

Signing blank certificates. On conviction the Notary may be confined for not less than two nor more than four years in the state prison and receive a fine of not less than $10 nor more than $1,000

STATUTE REQUIREMENTS

Jurisdiction. The jurisdiction of a Notary Public is coextensive with the limits of the state. A Notary may not be compelled, however, to act out of the limits of the county in which he or she resides.

Seal requisite. No Notary is authorized to act until he or she has procured such a seal as will stamp upon paper a distinct impression, in words or letters, sufficiently indicating official character, to which may be added such other device as may be chosen. All notarial acts not attested by such a seal are void.

Certificate. It is the duty of every Notary Public, at the time of signing any certificate of acknowledgment of a deed, mortgage or other instrument, or any jurat or other official document, to append to such certificate a true statement of the date of the expiration of commission as Notary Public. Non-compliance is often subject to a fine.

Certificate as evidence. The official certificate of a Notary Public, attested by the seal, is presumptive evidence of the facts therein stated in cases where, by law, the notary is authorized to certify such facts.

Policy period is four years, or the term of the commission.

Cancellation is effective when commission is terminated.

UNDERWRITING Generally, Notaries are appointed and commissioned by the governor upon certificates of qualification and moral character from the judges of the circuit courts of their counties. Before taking on their duties, they must take an oath of office administered by the clerks of the circuit courts of their counties and file official bonds to be approved by such clerks, in the amount of usually $5,000. They hold office four years. The office is ministerial and does not concern the administration of justice.


Approval of the applicant by the circuit judge is sufficient evidence to the Surety of acceptability.

PROCEDURE

The Surety company will be familiar with current procedure for obtaining an application for Commission and Bond form. In some areas, the underwriters furnish them; in others, they are obtained from the County Clerk's office. In an increasing number of counties, the applicant must personally take the form to the Judge of the appropriate court, who will certify to qualification and good moral character. The applicant then returns the signed form to an insurance agent with a check for the filing fee made out to the Secretary of State, as well as a check for the Bond premium. Most Sureties charge a minimum premium of $50.00. When Commission and Bond have been issued, the Bond must be signed and delivered by the applicant in person to the County Clerks' office, where it is filed subject to a minimum fee. The Notary retains the Commission.

BONDS FOR SPECIAL PUBLIC BOND ISSUES To assure the protection of funds accumulated through the sale of public bond issues by means of Surety bonds on the custodians of such funds, guaranteeing the faithful performance of their duties in handling and safeguarding the funds. Treasurers of political subdivisions already are bonded for the performance of their duties and their honesty in carrying out scrupulously those duties. An additional Surety bond is required when handling funds realized from the sale of special bond issues earmarked for construction of projects, which will improve or enhance their local jurisdictions. There are certain fiscal and legal responsibilities in connection with this procedure. Among them is the direct responsibility of the treasurer, or other fiscal custodian of the funds realized through the sale of the bonds, for safeguarding those funds and disbursing them for proper purposes. To finance its construction, a bond issue is placed on the ballot. If approved, the bond issue will be floated and the proceeds will be earmarked for that special project. It will be the duty of the treasurer or other fiscal officer to collect the funds resulting from the sale of bonds, to invest them in order to recover a part of the interest cost during the interval before construction starts, and to disburse the funds as the construction project for which the bonds were sold progresses to completion.

SURETY SAFEGUARDS

Among the methods of safeguarding these funds are Corporate Surety bonds which can be utilized in two ways to insure that objective: (1) by bonding the custodian of the proceeds of the bond issue, and (2) by bonding the construction project to be financed by those proceeds.


The special Surety bond usually required of the custodian to safeguard such funds is not statutory in form. A suggested form has been developed which has met with the approval of the majority of communities engaged in this procedure. The bond states basically that whereas "the principal, as treasurer of --------- will receive into his custody the proceeds to be derived from the sale of bonds of the bond issue authorized by resolution of ------- and numbered --------- in the amount of --------- Dollars for (purpose) and is required to give bond to cover such proceeds."

THE CUSTODIAN

An outstanding responsibility falls upon the custodian of the moneys realized from the sale of bonds for special purposes. Normally, the treasurer is the custodian of the general and other funds of the issuing governmental unit and he or she becomes the custodian of special bond issue moneys as well. The responsibility of the custodian of bond issue funds is in itself a serious one, and it follows that an adequate Surety bond should be furnished to safeguard those funds against loss and to protect the public's financial interest. If the funds, or part of them, are lost through dishonesty or failure of the custodian faithfully to perform his duties, the bonds themselves could depreciate and may even go into default. The taxpayers would probably have to shoulder the loss and no revenue would be derived to pay off the principal and interest. This stresses the importance of a special Corporate Surety bond on the custodian, in an amount sufficient to cover the funds.

RATES AND PREMIUMS

Annual premiums are determined by applying current rates to each $1,000 of the amount of proceeds, of the bond issue. The rate declines as the amount increases.

Bonds That Run to State and Local Governments

State and local governments require licenses or permits of many types of businesses -- from abstracters to wholesalers; from riding academies to used car dealers.

General Form.

WHEREAS, the above bound Principal has applied for a license to do business as a _____ in the city of _____, during the year ending _____, 20__.

NOW, THEREFORE, the condition of this obligation is such that, if said Principal shall well and truly observe the ordinances of the City of _____ in relation to ____ and conduct his business in conformity thereto and shall well and truly account for and deliver to any person legally entitled thereto any goods, wares or merchandise, article or things which may come into


his hands through his business as such _____ or in lieu thereof shall well and truly pay in money to such person or persons the reasonable value thereof. . .

The purpose behind license and permit bonds is to protect the public from unscrupulous business dealings. It guarantees that the principal will comply with all local regulations. In some cases, third parties may sue the principal directly, without having to go first to the government entity named as obligee.

Abstracters

WHEREAS, the above bound Principal doing business under the name of [ ] in the City of [ ], County of [ ], State of [ ], has made application for license as an abstracter in said County under Chapter [ ] of the laws of the state of [ ].

NOW, THEREFORE, the condition of this obligation is such that, if the above Principal shall well and truly comply with the Laws of [state] and faithfully discharge his trust and duties as an abstracter and shall pay any and all damages that may accrue to any party or parties by reason of any error, deficiency, or mistake in any abstract or certificate of title made and issued by said Principal, then . . .

An abstracter is someone who searches and verifies title to real estate. The report of an abstracter is used at real estate closings in order to facilitate the transfer of the property. A typical abstracter bond reads as above. These bonds indemnify the public if damaged by the negligence of the abstracter when preparing the title. They also cover fraud, but do not guarantee the title or the abstracter’s opinion concerning the title. Such bonds remove responsibility from the surety if the principal meets his or her obligations under the applicable statute. An applicant for an abstracters bond must have a thorough knowledge of real estate and probate law. The abstracter should "stand high in his community and be well-to-do." In some states, abstracter bonds are classed as "public official" bonds.

Master Electricians

THE CONDITION OF THE ABOVE OBLIGATION IS SUCH THAT, whereas, the above bound principal has made application to the State of _____ for a license to operate and engage in the business of master electrician under the laws of the State of _____ and the said State


having determined to grant such license upon filing this bond with the State Board of Electricity as provided by law.

WHEREAS, the above bound, as a licensed master electrician, plans to enter into contracts with others for the performance of electrical work and labor.

NOW, THEREFORE, if said principal shall faithfully perform all work entered upon or contracted for by said principal then this obligation shall be void, otherwise to remain in full force and effect.

Any person injured or damaged through the want of skill or the use of unsuitable material or improper use of material in the performance of any work contracted for or undertaken by said principal or his servants or his employees, may maintain an action hereon.

This bond shall be effective from the date said license is granted in the current year and shall expire one year from that date.

The master electrician has a special bond. Unlike the bonds issued to other electricians, the general public may sue directly on a master electrician bond. A master electrician requires 4 years of experience and should, therefore, be less of a risk than other electricians. Also, a master electrician is more likely to own, or to be affiliated with, a financially responsible firm. Abstracters and master electricians are two examples of occupations that utilize a fairly simple and generic license and permit bond.


Public Officials Bonds

Appointed and elected public officials require these bonds. They guarantee that public servants will faithfully perform their duties for the protection of public interests. Such bonds are under the jurisdiction of the Surety Association of America (SAA).

PUBLIC EMPLOYEES DISHONESTY BOND This bond protects the public against loss of public funds and property resulting from dishonesty on the part of the elected or appointed public employee. The employee dishonesty portion of this coverage is insured as part of the new Commercial Crime simplified policy program (see Coverage O and P). Coverage for faithful performance is covered under endorsement CR 10 44. The forms are under the jurisdiction of the Surety Association of America. Coverage may be arranged together with other crime insurance coverages under the Commercial Crime policy or on a monoline basis.

COVERAGE

Employees and other officials of political subdivisions other than the federal government are eligible for the public employees bond. Some of the bonds are required by law, others are provided voluntarily by the official. Coverage forms O and P of the commercial crime package are applicable to public employees. Coverage O provides coverage on a per loss basis, while Coverage P provides coverage on a per employee basis. This coverage may be issued as a monoline policy or as a coverage part in the commercial package. Both forms cover money, securities, and property other than money and securities against loss caused by employee dishonesty. Employee dishonesty is defined in the policy to mean only dishonest acts committed by an employee, whether identified or not, acting alone or in collusion with other persons. The act must be committed with the manifest intent to cause the insured to sustain loss and obtain financial benefit for the employee (other than legitimate forms of compensation) or a person or organization intended by the employee to receive the benefit. An endorsement (CR 10 44) adds Faithful Performance of Duty to the dishonesty coverage. Faithful performance covers failure of any employee to faithfully perform duties, when such failure has the direct and immediate result of a loss to covered property. Coverage includes the employee's inability to perform duties because of a criminal act committed by someone other than the employee. The differences between honesty coverage and faithful performance of duty coverage are readily apparent. The limit of insurance in both forms is on a "per occurrence" basis. Under Form O the loss is covered on a per loss basis, while under coverage P the loss is covered on a per employee basis.


EXCLUSIONS

The policy incorporates six exclusions contained in the crime coverage general provisions form. These exclusions relate to losses for acts committed by the insured and his partners, governmental action, indirect loss, legal expenses, nuclear and war hazard losses. In addition, there are five specific exclusions contained in the Public Employee Dishonesty form. They relate to the following:

Employees cancelled under prior insurance. Loss caused by any employee for whom similar prior insurance had been cancelled and not reinstated since the last cancellation;

Inventory shortages. Any loss the proof of which is dependent upon an inventory

computation or a profit and loss computation;

Loss caused by any employee required by law to be individually bonded;

Loss caused by a treasurer or tax collector;

Damages for which the insured is legally liable because of the deprivation or violation of the civil rights of any person by an employee, or the tortuous conduct of an employee.

LIMITS

The minimum amount of coverage available under Form O (per loss) is $5,000 and there is no maximum amount. The minimum amount of coverage under Form P (per employee) is $2500 and the maximum is $100,000.

OTHER PROVISIONS

The form provides that insurance is cancelled as to any employee when the insured discovers the employee committed a dishonest act whether before or after becoming employed.

ENDORSEMENTS

Endorsement CR 10 44 may be added to cover faithful performance of duty of the public employee to comply with the terms of requirements for bonding needed by public officials and employees. A School System endorsement (CR 10 48) modifies the definition of "employee" to include any student enrolled in a school under the insured's jurisdiction while the student is handling or has possession of property or funds in connection with sanctioned school activities. The endorsement also covers losses by treasurers, otherwise excluded under coverage forms O and P. An Obligee endorsement (CR 10 49) modifies the insuring agreement to include an agreement to indemnify the obligee named in the endorsement for loss covered by the form.


Coverage Form O Excess Over Coverage Form P (CR 10 53) is used when writing coverage form O (per loss) in excess over coverage form P (per employee) in the same policy.

UNDERWRITING

BOND HAZARDS

Bonds on public officers handle public funds are generally more hazardous than those on officers who do not handle funds, with the possible exception of peace officers. The hazards on bonds of officials who handle public funds include:

The personal honesty of the official;

His experience, competence, and ability;

Responsibility for the acts of his deputies, assistants and subordinates, involving their own honesty and competence;

Possible liability for the loss of deposits in non-designated banks that have failed;

Liability for loss due to forgery, burglary, robbery or holdup, for diversion of public

monies, for improper or illegal expenditures, for failure to collect taxes, for payments of warrants out of order, and for interest or profits realized. (If collateral or negotiable instruments are in the custody of the official, there usually is a liability for their proper safekeeping and return).

Among the hazards on bonds of officials who do not handle public funds are:

Improper directions or errors of judgment;

Liability for acts of deputies and subordinates;

Liability for false arrest, for improper or excessive attachments, for seizing the property of a stranger or levying upon property exempt from execution, and for authorization of funds that exceed appropriations; and

Liability due to failure to perform a positive and non-discretionary duty required by

statute. A public officer should determine his liability for loss of public money through forgery, burglary, and robbery by a careful review of the duties of his office. If it is provided that he shall keep safely all funds and make proper settlement with his successor, he should obtain a full crime coverage package of insurance on his office in order to protect himself. He is entitled to this protection, and because the public is thereby protected in return, public funds should pay the premiums for these coverages. The official, the producer, and the underwriter must work together to put the bond in place.


Beyond all other considerations is the protection the Public Official bond affords the public and the funds that belong to the public. Safeguarding the public interest is the primary concern of both the official and his surety.

INDIVIDUAL AND SCHEDULE BOND RATES

Rates for Individual and Schedule Public Official bonds vary from state to state and are quoted per thousand dollars of bond for each year it is in force. The Bond manual specifies rates for each state and all its political subdivisions according to the titles of the officials to be bonded. Annual minimum and annual earned minimum premium on all Public Official bonds is $100.00.

Surety Association of America

The public official bond, a standard form under the jurisdiction of Surety Association of America (SAA), provides fidelity protection on employees and officers of political subdivisions. However, this bond differs from a fidelity bond in two important ways: (1) it guarantees both the honesty and faithful performance of the principal; and (2) the principal has an expressed contractual obligation to both the obligor (the surety) and the obligee (the public). Although this coverage is now available with the commercial crime policy of Insurance Services Office, the need may still arise for a bond only without the other crime coverages. The types of public official bonds are:

1. Individual bonds: Written on a single official or employee for a specific amount. 2. Name schedule bonds: Written on officials or employees (each for a specified amount)

named in a list attached to the bond. 3. Position schedule bonds: Written on the officials or employees who occupy any of the

positions (each position for a specified amount) indicated in a list attached to the bond. Blanket bonds for public employees and public school employees are now part of the ISO crime program. The general rates in the Surety Association of America manual specify few classes. Most public officials and employees fall under the "general" heading. In most states the rate for this category is $2.50 per $1,000 of coverage. Some of the specialized categories indicated in the rules are: public housing authorities; peace officers; National Guard; public school treasurers; state treasurers; tax collectors; and notaries public.

Scope of Coverage

Employees and other officials of political subdivisions (other than the Federal government) are eligible for a public officials bond. Some of these bonds are required by law; others are provided voluntarily by the official. The requirements of the bonds may be dictated by statute or worked out on a case-by-case basis. Customarily called common law bonds, the last class is purely voluntary, subject only to the provisions of contract law. Whereas faithful performance was once covered in a separate bond, it can now be endorsed ("conditioned") to the bond. Coverage under these bonds is not cumulative. The term of the bond, unless statute dictates otherwise, runs concurrently with the official’s term of office. It remains in force until a successor is elected or appointed. When a new term of office begins, a new bond should be


filed. For employees or officials who hold office for an indefinite period, an indefinite bond is available. If law requires a bond, it usually does not contain a cancellation clause. However, some states do allow the surety, under certain circumstances, to terminate coverage for future acts or defaults of the principal. Some statutes allow for the discovery period of losses to be set in the bond; other statutes have unlimited discovery periods. The agent should check the law in the state where the bond is to be written.

Public Funds

A public official who has custody of public funds must turn over to his or her successor all funds and property for which he or she has been responsible during the term of office. There are, however, many ways (other than the dishonesty of the official) that such money or property may be lost or stolen. An official may be held responsible for the default of a deputy, clerk, or other employee who fails to perform his or her official duties. The official may also be held liable if public money is deposited in a bank that fails. The official must strictly comply with the law governing the deposits of public money. If state law designates only certain banks for use as depositories and one of those banks fails, then the official is usually exempt from liability. Finally, the official may be legally liable for funds or property in his or her custody that are lost through burglary, forgery, or robbery. Some public officers have jobs that could, if performed improperly, cause loss or damage to third parties, such as sheriffs, clerks of court, and recorders. For such employees, the bond may be written to cover not only loss to the obligee, but also loss or damage to third parties.

Statutory Public Officials Bond

KNOW ALL MEN BY THESE PRESENTS, That _____ as principal, and _____ as Surety are jointly and severally held and firmly bound unto (state, county, or political subdivision of which public official is an officer) in the penal sum of _____ Dollars, lawful money of the United states to the payment of which, well and truly to be made, we hereby bind ourselves, and each of us, our, and each of our heirs, executors, administrators, successors, and assigns, firmly by these presents. THE CONDITION OF THE FOREGOING OBLIGATION IS SUCH, That whereas the above bound principal was heretofore duly [elected, appointed] to the office of _____ in and for the _____ of _____ and State of _____. NOW, THEREFORE, if the said _____ shall faithfully and impartially, in all things, during his continuance in office, perform the duties thereof without fraud, deceit, or oppression, and pay over without delay to the officer entitled by law thereto, all moneys which shall come into his hands by virtue thereof, then this obligation shall be void; otherwise to remain in full force and effect.


Because the obligations of the principal under the above bond are dictated by statute, the surety’s liability is much greater than under other bonds. It is guaranteeing the faithful performance of a public official.

Position Schedule Public Official Bond

KNOW ALL MEN BY THESE PRESENTS, That (name of Surety Co.) herein called the Company, in consideration of an agreed (one, two, three, or four) year premium, insures and agrees to indemnify the (state, county, or political subdivision), herein called the Employer, against any loss caused by any Employee while occupying and performing the duties of any position named in the attached schedule, in the amount of coverage on each position set opposite thereto, through the failure of any such Employee to perform faithfully and impartially in all things, during his continuance in said employment, the duties thereof without fraud, deceit, or oppression, or to pay over without delay to the officer or other person or organization entitled by law thereto, all moneys and property which shall come into his hands by virtue thereof.

1. This insurance shall be effective beginning on and including the _____ day of _____, 20__, and shall continue in force until terminated as hereinafter provided but not beyond the _____ day of _____, 20__.

2. The amount of protection on any position designated in the schedule or any acceptance notice of the Company, may be increased or decreased without impairing the continuity thereof, by the Company executing its written acceptance notice, whereby it agrees to such increase or decrease, but not otherwise. Such increase or decrease shall be effective from and including the date of acceptance notice, unless a different date is specified therein.

3. Any newly created position that is substantially identical with any position designated in the schedule or any such acceptance notice, shall automatically be covered hereunder in the amount set opposite the position which is identical with the newly created position, provided such coverage will be null and void from the 90th day unless the Company is notified of such newly created position within 90 days after its creation and in no event shall the Company be liable after said ninety days unless it issues its acceptance notice, thereby bringing such newly created position under this Bond; provided further, however, that if the Company shall not within ten days of the receipt of such notification give written notice by mail to the Commissioner of Administration and to the head of the _____ Department referred to in Paragraph Nine hereof declining such additional coverage, it shall be deemed to have accepted the same.

4. Any newly created position that is not substantially identical with a position designated in the schedule or any such acceptance notice shall automatically be covered hereunder in an amount equal to the largest amount set opposite any position on the attached schedule or any acceptance notice, but in no event exceeding _____ Dollars, provided such coverage will be null and void from the 90th day unless the Company is notified of such newly created position within ninety days after its creation, and in no event shall the Company be liable after said ninety days unless it issues its acceptance notice, thereby bringing such newly created position under this bond; provided further, however, that if the Company shall not within ten days of the receipt of such notification give written notice by mail to the _____ and to the head of the _____ Department referred to in Paragraph Nine hereof declining such additional coverage it shall be deemed to have accepted the same.


5. The amount of protection on any position shall not be decreased by the payment of any loss, but the Employer, upon demand, shall pay an additional premium computed pro rata on the sum so paid, from the date of notice of loss to the end of the current premium year.

6. The total liability of the Company on account of any Employee, though he may have occupied more than one position, shall not exceed the largest amount of coverage on any one position occupied by him.

7. The liability of the Company with respect to any Employee shall terminate upon the discovery by the Employer of any loss hereunder caused by such Employee; and this insurance may be terminated in its entirety or as to any Employee or position by thirty days written notice mailed by the Company to the _____ and the head of the _____ referred to in Paragraph Nine hereof. The Employer may cancel the insurance at any time by written notice mailed to the Company at its Home Office.

8. Any salvage recovered under any loss hereunder, from any source other than third party indemnity and/or collateral security held by or for the benefit of the Company, shall be first applied after deducting the expense of collection to that portion of the loss if any, borne by the Employer, and the balance, if any, shall be paid to or retained by the Company.

9. This bond shall apply to Employees of the _____ Department of the _____.

IN WITNESS WHEREOF the Surety has caused this Bond to be executed by its duly authorized attorney-in-fact.

The position schedule bond is written on all who fill a particular position. It guarantees "faithful and impartial" performance of the duties attached to that position -- regardless of who occupies it. The bond provides 90 days automatic coverage for any newly created position that is "substantial with any position designated" on the bond. The amount of coverage for the new position is the same as the one to which it is most similar. If the principal does not notify the surety of the new position within 90 days, coverage for that new position is "null and void.” The surety has 10 days after notification to decline the new position. The bond also provides 90 days automatic coverage for any newly created position that is "not substantially identical with a position designated" on the bond. The new position is covered for the largest amount listed on the schedule. The surety has 10 days to decline the newly created position and if the principal does not officially notify the surety within 90 days, coverage for the new position is "null and void," as above. The total of the surety’s liability for any one employee is the highest amount applicable to that employee for one position, even though he or she may have held several different positions. When the surety pays a loss, the amount of coverage does not decrease. However, coverage for the employee who caused the loss is terminated. The surety may also demand an additional premium on the amount paid from the date of the loss until expiration.

Name Schedule Public Official Bond


KNOW ALL MEN BY THESE PRESENTS, That (name of Surety Co.) herein called the Surety, in consideration of an agreed (one, two, three, or four) year premium, agrees to indemnify the (state, county, or political subdivision), hereinafter called the Employer, for any loss caused by the Employee named in the attached schedule, while occupying and performing the duties of his employment while at any location in the employ of the Employer, through the failure of any such Employee to perform faithfully and impartially in all things, during his continuance in said employment, the duties thereof without fraud, deceit, or oppression, or to pay over without delay to the officer or other person or organization entitled by law thereto, all moneys and property which shall come into his hands by virtue thereof.

THIS BOND IS ISSUED SUBJECT TO THESE CONDITIONS:

1. This insurance shall be effective beginning on and including the _____ day of _____, 20__, and shall continue in force until terminated as hereinafter provided but not beyond the _____ day of _____, 20__.

2. The amount of coverage on any employee named in the schedule or any acceptance notice of the Surety, may be increased or decreased without impairing the continuity thereof, by the Surety’s executing its written acceptance notice, whereby it agrees to such increase or decrease, but not otherwise. Such increase or decrease shall be effective from and including the date of acceptance notice, unless a different date is specified therein.

3. Automatic coverage is provided in this bond for the first ninety days of service: (a) for any Employee succeeding one listed in the Schedule of Employees, in the same amount; (b) for any Employee occupying a newly-created position identical with that of any Employee listed in the Schedule of Employees, in an equal amount; (c) for any Employee occupying any other newly-created position, in the amount of _____. Said ninety day coverage shall be null and void from the 90th day unless the Surety is notified of the new employment within ninety days thereafter, and in no event shall the Surety be liable after said ninety days unless it issues its acceptance notice, thereby bringing the new Employee under this policy.

4. Liability of the Surety with respect to any Employee shall terminate upon the discovery by the Employer of any loss hereunder caused by such Employee; and this bond may be terminated in its entirety or as to any Employee by thirty days written notice mailed by the Surety to the _____ of the Employer and the head of the _____ Department referred to in Paragraph Six hereof. The Employer may cancel this bond at any time by written notice mailed to the Surety at its Home Office.

5. Any salvage recovered under any loss hereunder, from any source other than third party indemnity and/or collateral security held by or for the benefit of the Surety, shall be first applied after deducting the expense of collection, to that portion of the loss, if any, borne by the Employer, and the balance, if any, shall be paid to or retained by the Surety.

6. This bond shall apply only to Employees of the Department of _____ of the _____.

IN WITNESS WHEREOF the Surety has caused this Bond to be executed by its duly authorized attorney-in-fact.


The name schedule bond is very similar to the position schedule bond. Instead of providing coverage for anyone who holds a particular office, it provides coverage for a particular person while in the employ of the principal. The name schedule bond has a 90-day automatic coverage provision that applies to new employees and to current employees in newly-created positions. The principal must notify the surety of these changes within 90 days. This bond terminates for any employee when the employer discovers a loss attributable to that employee.

Rating

As is the case with blanket forms for commercial risks, the premium is determined by the number of employees and their duties. The classes enumerated on the "all states" page of the Surety Association manual are:

Public housing and urban renewal projects;

National guard, organized militia, or naval reserves;

Peace officers employed as guards or watchmen;

Agents selling hunting or fishing licenses;

Public officials who are "custodians of securities";

Special bond issues -- for public officials to cover the proceeds of a special bond issue. Particularly with a fairly large government office, the elected or appointed official cannot personally supervise the work and make certain that everything is handled, not only honestly, but strictly in accordance with the law. In many cases, a public official of this type can be held personally liable for losses caused by dishonest or careless employees -- and sometimes even where there has been a failure to provide insurance against losses such as burglary or holdup. Consequently, bonds of this type may protect, not only the governmental unit and the taxpayers, but also the personal assets of the supervising official.

Judicial Bonds

Judicial bonds are contracts of suretyship prescribed by statute and filed in probate or equity. They are used for many types of proceedings.

Judicial (or court) bonds guarantee that a person or firm, as the principal, will fulfill certain obligations specified by statute, such as faithful performance or financial responsibility for the benefit of another (obligee). If not, the surety will be liable for damages up to the bond amount or penalty.


Court Bonds

Court bonds are a class of judicial bonds that deal with actions in equity rather than in law for money damages or in probate court concerning faithful disposition of property of others. Courts of equity require these bonds to settle arguments involving specific performance, rather than arguments involving money damages. Probate courts require them to assure the faithful disposition of property of others. The primary purpose of court bonds is to protect a person (obligee) against loss in the event the principal (the person who purchases the bond) does not succeed in proving that he is legally entitled to the remedy he sought against the obligee. Since various types of court bonds are required to fit a multitude of circumstances and each type of bond must comply with statutes and rules of court procedures of states, it is obvious that the scope of court bonds is as broad as the law itself. There are many types of court bonds in use, however they can be classified into three groups:

Bonds in civil proceedings, i.e., plaintiff and defendants bonds;

Bonds in admiralty proceedings; and

Bonds for release of persons in criminal proceedings, such as bonds for bail. Court bonds are used in judicial proceedings, in admiralty proceedings, or by fiduciaries. Court bonds (sometimes referred to as litigation bonds) are chiefly concerned with actions in equity involving antagonistic interests. A court bond is often required when a party to a lawsuit seeks permission of a court to perform an act for which he claims a legal right, but which would result in an unjust loss or injury to the other party if the court ultimately decides he does not have that right. The bond guarantees the payment of damages, court costs or both if the person bonded is unsuccessful in his action. These court bonds can be classified into two groups:

A. Bonds in civil proceedings, i.e., plaintiff and defendants bonds; and

B. Bonds for release of persons in criminal or civil proceedings, such as bonds for bail.

CIVIL ARREST

Bond may be required of the party at whose instance an arrest is made. The bond will usually pay the costs and damages which the defendant may sustain, if it is finally decided that the arrest ought not have been made.

CLAIMANT'S BOND

In cases where, pending final decision on the merits, property is released to one who is not a party to the litigation, who claims to be the owner, the claimant may be required to post a bond for the return or redelivery of the property if ordered by the court.


Admiralty bonds. A complaint (a "libel") brought against a U.S. ship is handled exclusively in U.S. District Courts. The person bringing the action is called the "libellant.” An action brought against a ship is said to be in rem. Unless the owner of the ship posts a bond, the U.S. Marshal may hold it as security for the claim.

Fiduciary bonds. These guarantee that persons entrusted with the care of property

belonging to others under various forms of estates will exercise their duties faithfully, account for all property received, and make good any deficiency for which the courts hold fiduciaries liable.

The majority of fiduciaries are appointed in probate proceedings. It is for this reason that fiduciary bonds are referred to as probate bonds. These courts are called upon to:

Appoint administrators to settle estates of deceased persons who die without wills;

Appoint persons to serve as guardians of minors and incompetents; and

Select receivers or liquidators to handle bankrupt properties.

COURT BONDS FOR PLAINTIFFS AND DEFENDANTS Two major groups of court bonds involving civil proceedings are plaintiffs and defendants bonds. Plaintiffs bonds are issued to persons who commence actions against others in order to obtain some type of remedy other than money damages. These bonds guarantee that if the plaintiff is wrong in his action, the defendant will be paid for any damages sustained. Defendant bonds, on the other hand, are issued to targets of suits. Upon issuance of this type of bond, a defendant is allowed to regain possession of his property or to continue doing some act pending outcome of court action. If the court decides in favor of the plaintiff, the defendants bond guarantees that the defendant will pay the plaintiff for any damages sustained. Generally, for each type of plaintiffs bond there is a comparable defendants bond (at least one exception is the bond for the discharge of a mechanics lien. An owner of property that has a lien filed against it for labor and materials costs made and due purchases this. The owner may discharge the lien pending outcome of liability by posting a mechanics lien bond. This guarantees payment of any amount, interest, and other costs, if judgment is made against the owner). Following are descriptions of some of the more popular bonds of both types. The procedure here is to describe the bond for the plaintiff first and then its counterpoint for the defendant.

COURT BONDS FOR DEFENDANT The purpose of a Defendant's bond is generally to permit the principal to retain or regain control of property tied up by the litigation, or to postpone enforcement of a decree pending further court action. Since it serves to block the action taken by the plaintiff to assure satisfaction of his claim, the bond guarantees the settlement should the action be finally decided in favor of the plaintiff. This creates a liability for payment of a determinable definite amount in event of a


decision against the principal. Defendants' bonds are, for the most part, outright financial guarantees. Such a bond counteracts the effect of a bond furnished by the plaintiff in a court action. It preserves the rights of the opposing litigant in the granting of a privilege or a remedy to the defendant. In all cases, law prescribes the condition of the bond, the coverage, and only a bond that complies with the statutory requirements is acceptable and effective.

RELEASE OF ATTACHMENT BOND When the defendant’s property is attached, it may at the discretion of the court be released provided the defendant posts a bond guaranteeing to pay the entire judgment and court costs should the court decide in favor of the plaintiff. A release of attachment bond is used in this case. Permits the defendant to retain the money, merchandise or such other personal property as may be attached by a court, and guarantees that he will take good care of the attached property in the event it may be needed as further surety. This bond is usually given directly to the plaintiff. It contains a further guarantee that the defendant will turn over to the plaintiff the appraised value of the attached goods up to the amount of a judgment. A Release of Attachment bond is required to defeat the action of a plaintiff, previous to court decision, to attach property in question.

DISTRAINT FOR RENT If the personal property of a tenant has been seized in an action to collect rent, the defendant may have the property released upon giving bond.

DISCHARGE OF MECHANICS LIEN BOND A mechanics lien is a form of attachment. A Discharge of Mechanics Lien bond is a special form of bond to release an attachment. A lien against real estate may be filed for the amount claimed to be due for labor or materials furnished for the construction of a building or other improvement upon the property. Pending determination of the owner's liability, the owner may discharge the lien by giving bond for the payment of any amount that may be found due to the claimant with interest and costs.

COUNTER REPLEVIN BOND A writ of replevin is issued to recover specified personal property when it appears probable that the title of the plaintiff to the property is good. A counter-replevin bond is issued in a replevin suit. It has the same effect as a release of attachment bond. The defendant regains possession of the property pending decision of the court. However, if the defendant loses his appeal, the bond guarantees return of property to the plaintiff.


COSTS BOND Guarantees that costs in a suit appealed to a higher court will be paid. This bond is usually required of a defendant when he appeals. Costs bonds are carefully underwritten because of the requirements of some courts. Some are worded so that they guarantee the payment of money judgments awarded in court in addition to court costs.

APPEAL BOND An appeal may be granted to a defendant by a higher court if the court believes that errors were made in the lower court. A condition of the grant of appeal is that the appellant furnish bond, guaranteeing that if the case is decided against him, he will immediately pay the judgment with interest from the date of award in the lower court. The bond also guarantees payment of court costs assessed in both the higher and lower courts. Only about 20% of appeals are decided in favor of defendant appellants. Therefore, collateral is always required with the issue of Appeal bonds. The court fixes the bond form and amount of bond.

STAY OF PROCEEDINGS (Undertaking Form)

WHEREAS, by an order of the _____ Court of the State of _____, made on the _____ day of _____, 20__, it was ordered that pending the perfecting of an appeal by the plaintiff to the Court of Appeals from the judgment of the _____ appellate Division, and pending the hearing and determination of the said appeal, all proceedings by the Defendant, his attorneys and agents, for the enforcement of the said judgment, be stayed on the condition that the Plaintiff execute and file an undertaking with corporate surety in the sum of _____ Dollars ($_) conditioned for the payment of the difference between six per cent per annum and the amount of interest allowed by the depository, the _____ bank of _____, in the event that the said judgment shall be affirmed by the court of appeals.

NOW, THEREFORE, the Surety does hereby undertake that the Plaintiff will pay the Defendant the difference between six per cent per annum and the amount of interest allowed by the depository, the said _____ bank of _____, not exceeding, however, _____ Dollars ($_), if the judgment or order appealed from, or any part of it, is affirmed or the appeal is dismissed.

Appeal; stay of execution. When a judgment or order denies the plaintiff the remedy he sought, he must post an appeal bond if he wishes to have a higher court hear his argument. The appeal bond guarantees that the plaintiff will pay court costs on appeal. If the court instead grants the defendant relief, the plaintiff must post a stay of execution bond. This bond stays execution of the lower court’s decision pending outcome of the higher court hearing. It guarantees payment of judgment and other costs that may be awarded the defendant by the higher court. The bond in the above example reimburses the defendant for loss of obtainable


interest over what the depository institution pays, while the funds are tied up pending the ruling of the upper court.

STAY OF EXECUTION BOND A sheriff, who has been ordered by a court to levy against a defendant's goods, will delay executing the writ only when a satisfactory bond is given to him. The need for a Stay of Execution bond arises when the loser expects to win a counter suit and wants to delay paying the judgment until the second case is decided. Such a bond is not provided without collateral.

BOND TO DISSOLVE INJUNCTION Given by the defendant to counteract the effect of a writ of prohibition or injunction. When a court issues a restraining order to cease and desist from an activity that another party believes injurious to his rights, such a bond is required as a condition of terminating the writ. In an injunction case, the defendant may sometimes have a temporary injunction dissolved, provided he posts a guarantee that the plaintiff will be paid damages should a permanent injunction be granted after the decision of the court. But if the termination should result in a judgment against the defendant, the surety would forfeit the amount of the bond. Therefore, collateral is always required.

BAIL BONDS

Bail bonds are required to release persons involved in criminal actions. Generally, these bonds provide that the bonded person will appear in court at the time stipulated or the entire penalty of the bond will be forfeited. If the bonded person has committed a felony within the previous two years, the bond also guarantees that he or she will not commit another felony while under the bond.

UNDERTAKING FOR BAIL OR APPEARANCE -- Criminal Cases

WHEREAS, AN ORDER, having been made on the _____ day of _____, A.D., 20__, by _____ of the County of _____, state of _____, that [name] be held for [preliminary hearing, or to answer for trial] upon which he has been admitted to bail in the sum of _____ Dollars ($_).

NOW, THEREFORE, We, _____ as surety, a [name of state] corporation having its principal office in the City of _____, State of _____, do hereby undertake that the said [name] will appear and answer the charge above mentioned in whatever Court it may be prosecuted, and will at all times hold himself amenable to the orders and process of the Court and, if convicted, will appear for judgement, and render himself in execution thereof, and will not depart the jurisdiction without leave first having been obtained, of if he fails to perform either of these conditions, that he will pay to the State of [name of state] the sum of _____ Dollars ($_).

THE FURTHER CONDITION of this obligation is such that if a warrant is issued upon a charge of felony against the person admitted to bail hereunder, then, in such event, the surety herein named will, upon notice hereof, surrender such person to the proper authority.


It being with the knowledge of the surety that the defendant herein has been convicted of a felony within two years last prior to his application for admission to bail herein, this undertaking is subject to the further condition that said defendant will not commit any felony during the period of release on this bond.

Bail Bond Agents

BAIL BOND AGENTS FIDELITY BOND

KNOW ALL MEN BY THESE PRESENTS: That, [name] of [city and state], as Principal, and [name of surety company] as Surety, are held firmly bound unto the [state] Department of Insurance in favor of the People of this state, as Obligee in the sum of $_____ for the payment in lawful money of the United States of America of which sum the Principal and Surety bind themselves, their heirs, executors, and administrators, successors, and assigns jointly and severally by these presents.

WHEREAS, the Principal as Agent for _____, an insurance company legally licensed under the laws of the state of _____ has applied for a Bail bond Agent’s License for the term beginning _____ and ending _____ and this bond is to cover the term of said license; and

WHEREAS, by Section _____ of the Bail Act of [year] each Agent engaged in giving bail for an insurer is required to be licensed and before receiving such license, file a Fidelity bond in the penalty of [dollar amount] for the faithful performance of said Agents duty.

NOW, THEREFORE, the condition of this obligation is such that should a License be granted to the said Principal, then such LICENSEE shall during the term of said License faithfully observe all applicable [state] Statutes now existing, the [state] Bail Act of [year], and shall faithfully perform all the duties required by such laws, then this obligation shall be null and void; otherwise to remain in full force and effect, subject to the following:

1) The Insurance Commissioner or his duly authorized representative of the [state] Department of Insurance in favor of the People of the state of [name of state] reserves the right to declare this bond in default and shall be authorized to levy against said surety and principal under this obligation for due and proper distribution to any party or parties suffering as the result of any violation by Principal of said [state] Statutes existing now or as hereafter amended;

2) The aggregate liability of the surety under this bond shall not exceed the penal sum aforementioned; and any payment made by the surety to the [state] Department of Insurance shall act to reduce the surety’s liability hereunder by the amount of the payment;

3) This bond may be continued from term to term by Continuation Certificate signed and sealed by the Surety;

4) If the surety shall so elect, this bond may be cancelled by giving 30 days notice in writing to the Obligee.

IN WITNESS WHEREOF, the Principal has hereunto affixed his or her signature and the Surety has caused this instrument to be executed by its officer or attorney-in-fact proper for the purpose and its corporate seal to be affixed duly attested this _____ day of _____, 20__.


Many states license bail agents through the department of insurance. Most require the licensee to post a bond. The above is an example of such a bond. The underwriting of Plaintiffs' Court bonds requires a current and detailed financial statement of the applicant and investigation of his credit and responsibility through such sources as banks, business houses, and commercial reporting agencies. With this information and with knowledge of the probable extent of liability as estimated from the type of action, the kind and amount of property involved, and other facts of the case, a decision may be reached as to whether or not the principal will be able to meet any obligation arising from the suit. The most desirable Plaintiffs' bonds are those on behalf of banks, finance companies, and large business concerns selling merchandise under installment contracts.

COURT BONDS FOR PLAINTIFF A Court bond for a plaintiff enables the principal on the bond (the plaintiff) to seek a remedy in court to which he believes himself entitled. The object of the bond is to protect the other party from loss in the event the principal does not succeed ultimately in proving that he was legally entitled to the remedy or does not prevail in the ensuing litigation. Such a bond preserves the rights of an opposing litigant or other interested party in granting a privilege or remedy to the plaintiff. Law prescribes the coverage, and the privilege or remedy is not allowed until a proper bond is filed. Most bonds in this classification are bonds in civil proceedings, whether in State or Federal courts. However, court bonds for plaintiffs are also required in admiralty proceedings in the United States courts. Bonds required of plaintiffs are for the benefit and protection of the defendants. They are answerable for any damages suffered as a result of the action if the litigation is ultimately decided in favor of the defendants. Usually the amount cannot be definitely determined in advance but can only be estimated. The extent of possible damages will vary widely, depending on all the circumstances of the case. In the absence of a certain liability for the payment of an established amount, plaintiffs' bonds are regarded credit risks.

ATTACHMENT BONDS Attachment bonds guarantee that the plaintiff will prosecute the action, will pay damage to the defendant if the court decides he has been wronged, or will pay the costs of the action. They are furnished before a sheriff serves a writ of attachment often in an amount twice the value of the goods attached. The plaintiff may attach the goods of the defendant before judgment when the defendant: Is a nonresident or a foreign corporation; leaves the state secretly; is about to move his property out of the state without leaving enough to satisfy the plaintiff's claim; or is about to sell property with intention of cheating creditors.


An attachment bond is issued when the plaintiff wants to prevent the defendant from using, secreting, or disposing of property until the outcome of the court’s decision. This bond guarantees that if the court decides against the plaintiff, the defendant will be paid any damages he may suffer as the result of having his property attached. These bonds will be written without collateral if the applicant is a financially responsible individual or business establishment. Some companies require a financial statement from business houses and will not write a bond unless net worth is at least four times the amount of the bond.

UNDERTAKING ON ATTACHMENT (Plaintiff’s)

WHEREAS, _____, plaintiff, has commenced an action in the above entitled Court, against _____, defendant, to recover from said defendant the sum of _____ Dollars ($), together with accruing interest, and has filed the necessary affidavits to obtain an order of attachment against said defendant.

NOW, THEREFORE, the undersigned (Surety Company) of _____ State of _____, does hereby undertake to _____, defendant, in the penal sum of _____ Dollars ($), that the plaintiff shall pay the defendant all damages and costs, not exceeding the above amount, which he may sustain by reason of the attachment in this action if said order prove to have been wrongfully obtained.

DEFENDANT’S DISCHARGE OR RELEASE ATTACHMENT BOND

WHEREAS, an order of attachment against the defendant in the above entitled action has been issued out of the _____ (District Court) _____, after a filing by the plaintiff of the necessary affidavits by statute provided; on a suit to recover the sum of _____ Dollars, together with accruing interest; and

WHEREAS, the sheriff, under said writ, did attach and place in his custody for safekeeping sufficient property to satisfy said sum; and

WHEREAS, the defendant desires a release of said property and a discharge of said order, and pursuant to the means by law provided has filed this bond to secure the plaintiff’s claim if judgment be found for him.

NOW, THEREFORE, the condition of this obligation is such that, if the said defendant shall pay to the plaintiff in this action the amount of any judgement awarded thereunder against him, with interest and costs, if the plaintiff is successful against said defendant.

REPLEVIN BONDS

UNDERTAKING ON REPLEVIN OR CLAIM AND DELIVERY (Plaintiff’s)


WHEREAS, it is alleged by _____, plaintiff in the above entitled action, that _____, defendant, has in his possession, and wrongfully (or unjustly) detained, certain personal property (or those certain chattels described as) belonging to the said plaintiff, of the value of _____ Dollars ($), to the possession of which said plaintiff is fully entitled; and

WHEREAS, the plaintiff, being desirous of having said property delivered to him and, by endorsement in writing upon the affidavit, has required the Sheriff of _____ County, State of _____, to take the said property from the said defendant.

NOW, THEREFORE, We, the undersigned surety company in consideration of the premises, and of the delivery of said property to the said plaintiff, do hereby undertake and acknowledge to the effect that we are jointly bound in the sum of _____ Dollars ($_), being double the value of said property, as stated in the affidavit, for the prosecution of the said action without delay and with effect, for the return of said property to the said defendant, if return thereof be adjudged, together with the defendant’s costs in said action, or for the payment to the said defendant of such damages as may be recovered against the plaintiff, (Surety Company). . .

COUNTER-REPLEVIN, DEFENDANT’S CLAIM & DELIVERY OR RE-DELIVERY BOND

WHEREAS, _____, plaintiff, under and by virtue of an order and requirement duly made and issued in the above entitled action, and to him directed, did, on the _____ day of _____, A.D., 20__, take from the possession of the defendant in the said action the following described property, to wit:. . .

AND WHEREAS, the said defendant, _____, is desirous that the said property be redelivered to him by the said _____, plaintiff.

NOW, THEREFORE, the condition of this obligation is such that, in consideration of the premises, and the release of aid property to the defendant, that if the principal shall return said property to the plaintiff, if a return be decreed, in the same good order and condition as when released, and shall pay such costs and damages as may be awarded against him in said action. . .

A replevin bond is similar to an attachment bond, except that it is issued when the plaintiff is suing for recovery of specific property and the court has permitted him to take immediate possession of property pending trial. The hazard is increased if the subject goods are perishable or are adversely affected by market fluctuations. A writ of replevin is issued when the plaintiff in an action involving certain personal property can show that his claim to the property is apparently valid. As in the case of an attachment bond, this contract guarantees the return of the property to the defendant if the court decides against the plaintiff with compensation for any damage the court may decide the defendant has sustained.

INDEMNITY TO SHERIFF BONDS These bonds are written in connection with actions to eject tenants, to regain possession of property, or to prevent the defendant from getting rid of his property. Financial responsibility on the part of plaintiff is a requirement.


Such a bond is written to protect a sheriff charged with dispossessing a person. If the defendant believes he was wrongfully dispossessed, he might bring suit against the sheriff.

COSTS BONDS Courts require a bond guaranteeing payment of the costs of a trial when a plaintiff begins an action in a state in which it is not incorporated, does not maintain an office, or is a nonresident. When the plaintiff is a business house with a good rating and a capable attorney, collateral is not required. But, when the plaintiff is an individual, collateral up to the amount of potential costs is usually necessary.

COSTS ON APPEAL When a plaintiff is unsuccessful in an action and wants his case retried in an appellate court, he must furnish an Appeal bond. The bond guarantees payment of trial costs and is issued only for financially responsible persons.

INJUNCTION BONDS

PLAINTIFF’S INJUNCTION BOND TO DEFENDANT

WHEREAS, the above named plaintiff has duly applied to this court for a preliminary restraining order and a temporary writ of injunction against the defendant in this action, according to the statute in such cases provided.

NOW, THEREFORE, the condition of this obligation is such that, if the said plaintiff shall pay the said defendant such damages as he sustains by reason of said preliminary restraining order or temporary injunction, if the Court finally decide that the said plaintiff is not entitled thereto to either or any of them, if more than one defendant),

DEFENDANT’S DISSOLVE OR DISCHARGE INJUNCTION

WHEREAS, the above named defendants, by temporary restraining order granted by the court in the above entitled matter, have been enjoined from _____ (for instance, the transfer of certain shares of the corporation’s stock) _____, and

WHEREAS, the said defendants desire to have such order set aside and matters returned to their status quo, and the court upon reviewing the circumstances, and upon the filing of this bond, has made its order dissolving said injunction pending a hearing and determination in the premises.

NOW, THEREFORE, the condition of this obligation is such that, if the court finally decrees for the plaintiff in this action, and if the defendants will pay to said plaintiff all damages and costs the plaintiff my sustain through (for instance, the transfer of said corporation shares)


When an injunction is issued by the court at the request of one person, it generally requires that another person perform or refrain from performing some particular thing until the outcome of the court hearing. Under these circumstances, the plaintiff must post a bond guaranteeing to reimburse the defendant for any damage sustained because of this injunction in the event a permanent injunction is refused. An injunction is a judicial process generally issuing out of a court of equity, whereby the defendant is required to do or refrain from doing a particular thing. An order granting an injunction may be conditioned upon the furnishing by the plaintiff of a bond to indemnify the defendant against loss in case it be finally decided that the injunction should not have been granted. Collateral is often required and financial responsibility always underwritten.

Collateral Security In many cases, sureties will issue various court bonds only on receipt of collateral security. They may require this security even though the bond applicant shows the ability to pay court costs, interest, or damages if a court decision is rendered against him. The reason posting collateral is necessary is that by the time the argument between plaintiff and defendant is finally settled, the principal may find himself in a financial position where he is unable to pay for damages. This would put the surety in the position of having to pay because the bond it issues is a guarantee of the principal’s promise to perform or pay according to the ruling of the court. The various types of acceptable collateral include cash, certified checks, bank certificates of deposit, assigned savings accounts, assignments of cash values on life insurance and United States government bonds and treasury notes.

Bond Forms Court bonds are very much like fiduciary bonds. In other words, the terms and conditions of court bonds are prescribed by statute, the bonds are non-cancelable and continue until matters between parties are officially settled or the statute of limitations has run.

UNDERWRITING In determining whether or not a particular bond is an acceptable risk, a number of factors must be considered. Among them are type of action, the guarantee required, the financial responsibility of the principal, the nature of the property involved, counter-replevin availability. Complete up-to-date financial information is necessary to the underwriting of Defendants' Court bonds, which are essentially outright financial guarantees. Experience proves that most plaintiffs win their cases. In connection with appeals, a majority of lower court verdicts are sustained. Consequently, even greater care must be exercised in writing bonds for defendants than for plaintiffs. The problem is whether the applicant will be able to pay the judgment plus interest and costs when the litigation is finally terminated. It is frequently necessary to require collateral to the full


extent of the bonds because it is not possible to know the financial condition of a principal at a future date.


FIDUCIARY BONDS The word "fiduciary" is the generic term for persons or legal entities such as executors, guardians, and trustees appointed by the court, under a will or by a trust, for the purpose of managing, controlling, or disposing of property of others. These persons or fiduciaries are also known as principals under contracts of suretyship. The majority of fiduciaries are appointed in probate proceedings. It is for this reason that fiduciary bonds are also referred to as probate bonds. Fiduciary bonds guarantee that persons entrusted with the care of property of others under various forms of estates will exercise their duties faithfully, account for all property received and make good any deficiency for which the courts -- probate or equity -- hold fiduciaries liable. A Fiduciary Bond protects those (an individual in the case of a guardianship) having interest in an estate or in property when it is involved in bankruptcy, conservation, or liquidation proceedings. Interested parties may be heirs, infants, incompetents, creditors or other beneficiaries. Administrators, executors, guardians, and trustees are the most familiar fiduciary risks. The fiduciary is identified in bonding as the principal, and may be an individual or institution. Faithful performance of duty is not considered a high-risk obligation, when legal counsel and court supervision in estate matters aid a fiduciary. However, significant information developed in applications or inquiry is scrutinized by company Bond underwriting specialists. Rates are quoted in the Bond Manual for the various fiduciary classes on a "per thousand" basis. In court-supervised matters, the Bond penalty (or required amount) is usually fixed by the court. The fiduciary bond covers faithful performance of duties. It is written for an indefinite period, for such period as is required to administer and account for the trust. Such bonds do not contain cancellation clauses. In many states there is no statutory provision for the release or discharge of a Fiduciary bond until the administration has fully run its course and the proceeds have been accounted for. It is not necessary that the fiduciary actively mismanage or commit fraud in order that the bond be forfeited. Negligently doing nothing may be valid cause. Misfeasance, malfeasance, and nonfeasance impose equally serious responsibility on the fiduciary. Failure to take affirmative action where action is necessary on the part of the fiduciary may place the surety in an embarrassing position. Should the fiduciary deposit funds in his personal account he becomes an absolute guarantor of the funds. The surety would be forced to pay if he should die, go into bankruptcy, or acquire large debts. It is necessary to segregate the funds of an estate. It is not intended that a Fiduciary bond cover a depository hazard. All that a surety company proposes to do and all that it is required to do through the issuance of a Fiduciary bond is to warrant the honesty and the faithful administration of the trust in accordance with the laws of the jurisdiction. COVERAGE Fiduciary bonds are instruments written on behalf of persons appointed by the court, or in a will or deed of trust, to take possession of an estate or property, manage and control it, and finally to


account for, transfer or distribute it as required by law. The fiduciary is an agent of the court and merely the medium through which the court exercises its custody. Fiduciary bonds are statutory and in many instances the required form of bond is set forth by law. While they may differ in detail in different jurisdictions, the basic guarantees--that the principal will faithfully and properly perform his duties as required by law--are the same. Law generally prescribes the duties of a fiduciary. In addition, he must comply with all lawful orders that may, from time to time, be issued by the court having jurisdiction. This bond covers loss resulting from any failure faithfully to perform such duties or orders. A fiduciary is prohibited from using trust moneys for his own personal use. In the event he diverts trust funds for this purpose, the bond is liable for any loss sustained by the estate. Embezzlement losses often remain hidden for a period of years, but the surety is liable on its bond until applicable statute of limitations has run. The duties of a fiduciary always include the obligation to account for the assets of the trust estate, showing he has made only such disbursements as are authorized by law. At the termination of the trust, he must distribute the balance to those who are legally entitled to it. The bond provides protection to the beneficiaries against loss through improper disbursements, even though made by the fiduciary in good faith. Fiduciaries are obligated to conserve the estate, which may include the duty to invest its assets to yield an income. The laws of each state outline duties and liabilities of such fiduciaries with respect to conservation and investments. The bond covers the principal's liability resulting from failure to comply.

UNDERWRITING Estate bonds are often needed in a hurry and an agent can expedite their handling by gathering information the underwriter will need, such as: the name and address of the principal and attorney and Bond particulars; and penalty and county of filing. Three important factors must be examined by the underwriter for the Bonding company in passing on the desirability of any Fiduciary bond: The principal, the attorney, and the estate. The integrity of the applicant (the principal), his business capacity, and his financial worth are considered. If there is any doubt about his honesty, declination is certain. The importance of business capacity is relative to the amount of assets to be handled and the character of the duties to be performed. He is less likely to yield to temptation and is likely to have the ability to successfully carry out his duties. Joint control may be the only means by which a bond is obtainable when these considerations are not entirely favorable. The caliber of the principal's attorney must be taken into account. The handling of an estate may involve legal technicalities requiring the services of an especially able lawyer. A risk is likely to be desirable when it is administered under the close supervision of an outstanding attorney. The circumstances and conditions of the estate itself must also be considered. Whether the risk is long or short term, the nature of the assets and the liabilities, the number of the heirs or


beneficiaries and their whereabouts, whether trusts have been created under a will, and the date of death or creation of ward status are important considerations. If trusts were created, the Surety will want to know if they will be conducted under its bond or if its liability will be terminated with respect to them. If date of death or creation of ward status was not recent, the Surety will want to know where the assets have been and who has had custody of them to date.

USE OF APPLICATION An attorney-in-fact for the insurance company is the only person who may place a Fiduciary bond in force. The risks involved in underwriting such coverage are so great that skilled, specialized knowledge is required. Such authority is usually confined to bond underwriters of the company, but is sometimes delegated to selected agents up to specified limits of liability. Bonds greater than the authorized limit must be referred to the company. A completed application is usually required in connection with a Fiduciary bond. When the attorney-in-fact is present at the courthouse or other place where the bond is filed, the application often need not be completed previously. Otherwise, the application is submitted to the branch or service office of the company for a bond to be issued. The facts in the application must be accurate and it must be signed by the person to be bonded. Answers to questions in the application sometimes reveal hazardous elements that warrant special consideration. The following questions are studied carefully and have a bearing on the acceptability of a bond: Whether or not the applicant or any organization in which he is interested is indebted to or is security for any indebtedness to the estate; date of appointment to the trust; whether application is for a first bond, and if the bond takes the place of another bond, why substitution is necessary; if assets consist in whole or in part of a running business.

SHORT AND LONG-TERM There are two classes of fiduciary bonds (short-term and long-term), which can be briefly catalogued in accordance with the functions, and duties of the fiduciaries, as follows: Where the fiduciary's duties are to collect the assets of the decedent, pay the debts and distribute the remainder according to law. Within this class are executors, administrators, and receivers and trustees in bankruptcy. These usually are short-term bonds. Where the fiduciary's duties are to preserve the assets and invest them, and to disburse or accumulate the income. Such fiduciaries are guardians of minors, guardians, committees or conservators of incompetents, and trustees under will or deed. These usually are long-term bonds, although they may become short-term if within a year or two the minor becomes of age, the incompetent dies, or the trust terminates.

RATE AND PREMIUM On all court Fiduciary bonds, the initial premium is fully earned if the trust is completed, the estate closed or withdrawn from control or custody of the court, wound up by distribution to the beneficiaries or creditors, or by final discharge of the fiduciary in any other manner. If the bond is canceled within the first year, the premium has been fully earned and no refund is to be made. If a court Fiduciary bond is canceled in its second or any subsequent year, pro rata


refund of unearned premium may be made for the unexpired portion of the bond year in which cancellation occurs, subject to a reasonable earned premium. Bonds in probate and other courts are rated per thousand on an annual basis. Bonds applicable to masters, referees, trustees or commissioners for the sale of real estate, or other property, in partition, foreclosure, reorganization or winding up proceedings carry an annual rate per thousand when the applicant's duties do not require investment of assets or any duties other than the sale and distribution of proceeds. Bonds for fiduciaries appointed by a court to manage or liquidate property or a business are charged for at a slightly higher rate per thousand. Bonds for assignees, liquidators, trustees or others appointed for benefit of creditors by an insolvent debtor to liquidate the debtor's assets and make distribution to creditors carry a substantially higher rate per thousand on the penalty of the bond. Bonds in bankruptcy courts for agents, appraisers, creditors' committees, custodians, examiners, petitioning creditors and stockholders' committees or their agents are charged at a similar rate per thousand per annum. Bonds for receivers or trustees appointed solely to marshal assets, liquidate, and distribute to creditors, cost is substantially lower. There are seven groups of bonds in the fiduciary classification. They are:

Decedents' Estate bonds: Bonds in estates of deceased persons or persons presumed dead on account of long absence.

Incompetents' bonds: Bonds in estates of incompetents.

Minors' bonds: Bonds in estates of minors.

Trustees' bonds, bonds in trust estates under a will or deed.

Bankruptcy bonds: Bonds filed in United States District Courts under bankruptcy laws.

Bonds in Equity Proceedings: Bonds filed in courts of equity or courts exercising equitable jurisdiction. Included are equity receivers, liquidators, trustees and other appointed by court to manage or liquidate property.

Miscellaneous Fiduciary bonds: Bonds of conservators or liquidators of financial institutions and others not within any of the above descriptions whose principals may or may not be subject to the jurisdiction of a court.

Executors and administrators are similar except that the executor, named in the will distributes in accordance with the terms of the will while the court appoints the administrator in the absence of a named executor, in accordance with the statutes. Should an administrator, or other fiduciary, negligently fail to reduce to possession property belonging to the estate and as a result the estate should suffer a loss, he would be responsible for such loss to the same extent as if he had reduced the property to possession and misappropriated it. The duties of the executor or administrator in the administration of an estate are substantially as follows, although not all are applicable in every detail: First, he must take possession of the decedent's estate, personal and real, and collect the debts due the estate. He must give notice


by publication, as prescribed by law, warning those having claims against the estate to present them. He must file an inventory of the estate assets, take care of immediate post-funeral expenses, pay the decedent's just debts, including income, personal property and inheritance taxes, file an account with the court showing receipts, disbursements and balance on hand, make proper distribution of the estate, and finally present to the court suitable evidence of distribution, and ask for his and the surety's discharge.

Estates of Deceased Persons or Persons Presumed Dead

WHEREAS, by an order of the (Probate, District, or Surrogate Court) _____ of the _____ (County, Parish, or Judicial District) _____ of the State of _____, the above bound _____ has been appointed Administrator of the estate of _____ deceased, who died intestate, and Letters of Administration were directed to be issued to said Principal upon the furnishing of a bond according to law in the sum of _____ Dollars ($____). NOW, THEREFORE, the condition of this obligation is such that, if the said _____ shall well and faithfully execute the duties of said trust according to law, and shall well and truly perform all official duties now required by law, and all such additional duties as may be imposed by any law of the State, and shall account for and pay over and deliver to the persons or officers entitled to receive the same, all moneys or other property that may come into his hands as such administrator.

Fiduciaries in this class include executors (those named in wills to settle estates); administrators (those appointed by courts to settle estates of persons who die without wills); and various kinds of special administrators. The duties of the fiduciaries involve collecting, preserving, and distributing assets of an estate according to the terms of a will or by terms specified in a statute. Trustees derive their authority from the instruments under which the trusts are created. The general duties of a trustee, whether under a will or a deed, are about the same as those of other fiduciaries so far as the safekeeping and segregation of assets are concerned. One of the most important duties of a trustee, however, is the investment and reinvestment of trust funds. For his protection and the protection of the estate, the trustee must rigidly observe the terms of the trust instrument. Where there is doubt as to its meaning, court orders should be obtained before responsibility is incurred. If the instrument creating the trust does not specify the character of securities in which an estate may be invested, the trustee should look to the statutes for the purpose of determining the character of securities in which he may safely invest.

Trustees

WHEREAS, by an order made by (District, Surrogate, or Probate Court) _____, the Principal, _____, was appointed as Trustee(s) under the Last Will and Testament of _____, deceased. NOW, THEREFORE, the condition of this obligation is such that, if the said _____ shall faithfully discharge the duties of (his, her, or their) trust as such trustee(s) and obey all orders of any Court of competent jurisdiction or . . .


NOW, THEREFORE, the condition of this obligation is such that, if the above bounden _____ shall faithfully execute the trust reposed in him as Trustee(s) under the Last Will and Testament of _____, deceased, and obey all lawful decrees and orders of the _____ Court of the County of _____, touching the administration of the trust committed to him.

Generally, a trust is a fiduciary relationship between a trustee who has equitable ownership in property and the creator of the trust who has legal ownership in the property. The trustee is given the responsibility of performing certain specified duties for the benefit of the trust beneficiaries and the trustee is charged with a high degree of care in carrying out his duties. When a trust is set up to take effect at the death of its creator, it is termed a testamentary trust. When drawn and utilized during the lifetime of the creator, it is an inter vivos trust.

Estates of Minors or Incompetents

WHEREAS, an Order was made by the _____ Court of _____ County on the _____ day of _____, 20__, appointing the above bounden principal Guardian in the estate of _____ (minor or incompetent) _____ and letters of guardianship were directed to be issued to (him or her) upon (his or her) executing bond according to law in the sum named.

NOW, THEREFORE, the condition of this obligation is such that, if the said Principal shall faithfully discharge the duties of guardian of such ward according to law .

Guardians are appointed to administer the affairs of persons under age and considered legally incapable of acting for themselves. There are also special guardians appointed for various specified purposes such as to preserve assets of an estate of a minor during a litigation that delays the appointment of a general guardian. Conservators, committees and custodians are fiduciaries appointed to take care of assets of others whom the court has adjudged incapable of handling their own property. Guardians, committees, tutors, curators, conservators and other trusts of a comparable scope, whether the ward is an infant or an incompetent, are trustees of a sort. A guardian generally is held to a more strict accountability than the average trustee because governing bodies are careful with regard to infants and unfortunates. Generally, securities approved for investment by trustees are acceptable as investments by guardians. A guardian should invest in approved securities only, and if the statutes are silent on investments, court orders should first be obtained. Receivers in bankruptcy are appointed following the petition of creditors of alleged bankrupts. The term of a receiver's office is not long. He takes possession and preserves the assets of the bankrupt until a meeting of creditors is called. A trustee is elected at that time. The trustee is under the direct supervision and guidance of the referee in bankruptcy. The referee in bankruptcy is an officer of the court and supervises the trust to the extent of countersigning checks drawn by the trustee.


Equity Trusts

KNOW ALL MEN BY THESE PRESENTS, That, Whereas, (Obligee) of _____, has duly constituted and appointed (Individual, Firm, or Corporation) and his (or her) true and lawful attorney under a certain power-of-attorney dated _____, 20__, and has entered into an accompanying trust agreement, under which agreement the Principal on this bond has been appointed as Trustee to carry out and perform the conductions of said trust, and

WHEREAS, the said _____, is required by the terms of said agreement to furnish a bond to indemnify _____, the said Obligee and creator of this trust, against any acts of fraud or dishonesty which said Principal may commit as Trustee while acting under said power of attorney in the performance of said agreement.

NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION IS SUCH, That the said _____ (hereinafter called the Principal) as Principal, and the _____ (Surety) as Surety, hereby bind themselves, their heirs, successors, and assigns to pay unto _____ (hereinafter called the Obligee), such pecuniary loss, not exceeding _____ Dollars ($), as the Obligee shall have sustained by any act or acts of fraud or dishonesty on the part of the Principal, either directly or through connivance with others (excepting, of course, with the Obligee), while performing the duties of said trust, for and during the period beginning _____, 20__ and ending upon termination of this suretyship, as provided below.

THIS BOND IS ISSUED SUBJECT TO THE FOLLOWING CONDITIONS, which are precedent to any recovery hereunder:

1. LIABILITY OF THE SURETY. The liability of the Surety is hereby limited to any act or acts of fraud or dishonesty on the part of the Principal, and does not extend to breach of performance of said trust contract, anything in the power-of-attorney, to the contrary, notwithstanding.

2. LOSS. Loss, if any, shall be covered only in the event that such loss is discovered not later than twelve months after the termination of this suretyship. The Obligee, upon discovery of any facts or circumstances indicating a possible loss hereunder, shall give the Surety immediate written notice thereof, delivered to the Surety at its address in the city of _____, such notice to set forth the name and last known address of the Principal. Within ninety (90) days after the date of such notice the Obligee shall file with the Surety a sworn, itemized statement of loss hereunder. No suit or action of any kind against the Surety for recovery of any claim under this bond shall be sustainable unless the suit is commenced and process duly served within 12 months after the first discovery of any loss hereunder, or any facts or circumstances indicating a possibility of any loss hereunder.

3. TERMINATION. The suretyship hereunder shall terminate as follows:

a. By the Surety, giving 30 days written notice to the Obligee, the Surety refunding the unearned premium as soon as determined.

b. By the Obligee giving written notice to the Surety of its intention to terminate the bond, upon which the Surety shall return the unearned premium, if any, as soon as determined.

c. Upon discovery of any loss or any facts or circumstances indicating a possible loss caused by the Principal.


d. Upon severance of the Principal from the employee of the Obligee as Trustee under said agreement.

IN WITNESS WHEREOF, the Principal and the Surety have hereunto set their hands and seals this _____ day of _____, 20__.

Another class of fiduciary bonds is filed in courts of equity. Included in this class are equity receivers, liquidators, trustees, and others appointed by the court to manage or liquidate property. Others in this class are assignees, liquidators, trustees, etc. who are appointed by insolvent debtors to liquidate and distribute property for the benefit of creditors.

PETITIONING CREDITORS IN BANKRUPTCY Bankruptcy proceedings may be brought against a reluctant debtor by three or more petitioners. When they have exhausted all other means of collecting their money, they may take action and post bond to indemnify the alleged bankrupt if the facts show he is not bankrupt. Such a procedure is followed when the defendant will not declare voluntary bankruptcy.

Bankruptcy Bonds

KNOW ALL MEN BY THESE PRESENTS: That we, the Principals listed in Schedule "A" attached hereto, and those who may from time to time be added to said schedule, as amendment, and _____, a Corporation duly licensed to do business in the State of _____, as Surety, are held and firmly bound unto the United States of America in the amounts stated in said schedule as to each named principal, in lawful money of the United States, to be paid to the United States, for which payment, well and truly to be made, we bind ourselves and our heirs, executors, administrators, and successors, jointly and severally by these payments. THE CONDITION OF THIS OBLIGATION IS SUCH THAT: WHEREAS, the United States Bankruptcy Court for the District of _____ will appoint Trustees in cases commenced under Chapter 7, Title II, United States Code; and WHEREAS, the said Principals listed in Schedule "A" attached or subsequently added thereto by amendment may hereafter be appointed to serve as such Trustee in one or more of such cases; NOW, THEREFORE, if the said Principals listed in Schedule "A" attached or subsequently added thereto as Trustee as aforesaid shall obey such orders as the United States Bankruptcy Court or any of the judges of such courts may make in relation to the trust undertaken by said Trustee, and shall faithfully and truly account for all moneys, assets, and effects of each estate created by the commencement of each case in which he has been appointed or will be appointed, and shall in all respects faithfully perform all his official duties as Trustee, then this obligation to be void; otherwise, to remain in full force and effect.


The liability of the Surety hereunder shall not exceed the amount stated in said Schedule "A" for any one case as to each named principal, or the aggregate amount stated in said schedule "A" as to each named principal for all cases on which claims are asserted as to each named principal regardless of the number of years this bond is in effect and regardless of the number of cases involved. This bond shall remain in full force and effect with respect to all cases pending in this court, in which the said Principals listed in Schedule "A" attached or subsequently added thereto have been appointed, until the Surety has terminated further liability after 30 days written notice filed with the Clerk of the United States Bankruptcy Court of the District of _____. SIGNED AND SEALED this _____ day of _____, 20__.

A third class of fiduciary bonds is required in bankruptcy proceedings of federal courts. Receivers are commonly appointed in bankruptcy to collect and protect assets of an alleged bankrupt usually on petition of creditors. After the creditors have met, a trustee is appointed to take legal title and to hold and distribute the property in accordance with the decrees of the court. Sellers of real estate may be special commissioners, trustees, or attorneys. The terms of such offices are relatively short. After making the sale, the trustee or commissioner accounts for the proceeds. Real estate bonds for guardians, trustees, administrators, or executors are different in that the proceeds from the sale become part of the trust and must be administered accordingly. Bonds for such fiduciaries continue until the expiration of the trust.

Miscellaneous Fiduciary Classes

Finally, there is a miscellaneous class of fiduciary bonds available to cover receivers, trustees, and conservators of financial institutions and insurance companies. State or federal courts depending upon the type of proceeding may appoint these persons or fiduciaries.

Fiduciary Bond Provisions

Most fiduciary bond provisions are prescribed by statute. Generally, these bonds are brief instruments that recite the obligations assumed and the capacity of the fiduciary. These bonds also contain the statement that the principal and surety are jointly and severally bound to the state or court for the faithful performance of the principal’s duties and the accounting of all property received. The bond must be signed by the principal (fiduciary) and the surety. The penalty of the bond (similar to an insurance policy’s limit of liability) is also established by statute. In some states it is required to be equal to the estimated assets of the estate; in other jurisdictions it must be double that amount. As the assets of an estate are reduced by distribution or payment of claims, some courts permit the bond penalty to be reduced proportionately. Other jurisdictions do not permit reductions in bond penalties. In these cases, however, surety companies, on receiving proof that assets have been reduced, will usually permit a proportionate reduction in premium.


The bond is a continuous instrument and requires no renewal to be binding. The fiduciary bond does not have a cancellation provision; the bond continues until the courts officially discharge the fiduciary and the surety. Many states have statutory provisions that permit sureties to terminate liability for future acts of fiduciaries. Premium charges are generally made annually. The surety is liable from the time the bond is approved until the proceedings are terminated and the surety released. Since the duties of a fiduciary are generally prescribed by statute and, in some aspects, by the courts, it is difficult to make categorical statements concerning rights of beneficiaries, obligations of fiduciaries, and the scope of judicial bonds. There are, however, several areas where uniformity exists concerning the scope of most bonds. For example, sureties under judicial bonds are responsible for losses sustained by beneficiaries through embezzlement of the fiduciary. Since embezzlement losses are difficult to detect and not usually discovered until after long periods, the surety is generally held liable under its bond for this type of loss until the expiration of the statute of limitation. Also, a fiduciary is held accountable for assets of estates and is permitted to disburse only those funds authorized by law. This means that a beneficiary is protected under a judicial bond whether a fiduciary’s improper disbursements are willful or not.

Joint Control Sometimes a surety company agrees to write a fiduciary bond only when given joint control over the assets of an estate. Joint control means that the estate monies deposited in a joint bank account of the fiduciary and surety are disbursed by the fiduciary only with the surety’s countersignature. Joint control agreements are sometimes required by the company as a condition precedent to the issuing of a bond. Widows often find themselves in a fiduciary capacity without having had the business experience necessary to accomplish the job. The surety then asks for joint control. All cash and securities must be deposited in a specified bank or trust company. No checks will be honored on the account unless countersigned by the surety. When there are securities in connection with the estate, the surety will require the bank to sign a safe deposit box joint control agreement. Then the bank will not permit the party bonded to have access to the box except in the presence of the surety. A joint control agreement provides safeguards that are a great advantage to an inexperienced fiduciary. The company makes certain that the assets are properly handled and helps the fiduciary in his legal obligations. Joint control makes possible the acceptance of risks that would otherwise be unacceptable. The primary purpose of joint control is to protect the beneficiary of an estate against loss caused by neglect of a fiduciary in disbursing property.


FEDERAL BONDS These bonds are those required by Federal agencies that regulate the activities of businesses, such as manufacturers, wholesalers, and large retail outlets that import commodities from other countries. They guarantee that the bondholders will faithfully comply with Federal standards, and they will pay any taxes or duties that may accrue, or pay the penalties should they fail to do so. The more important Federal bonds are in three major categories: Immigrants bonds, Internal Revenue (excise) bonds, and Customs bonds. They are issuable only on the appropriate Government forms, and each form carries a number and a descriptive title.

IMMIGRANTS BONDS These bonds are given in behalf of laborers, migratory workers, students, professional entertainers, athletes, tourists and others lawfully entering the United States, as well as bonds given by hospitals authorized to receive alien patients; by employers importing alien workers for use in this country; by transportation companies for payment of fines or sums imposed on them under Immigration laws and regulations. Also for aliens in transit through the United States in route to foreign destinations, including UN Headquarters in New York, and bonds conditioned that aliens will not become public charges. Bonds are required of immigrants who come here temporarily to study or for other legitimate reasons, such as marriage to American citizens. These bonds are not particularly desirable on the part of surety companies and cash collateral in at least the amount of the bond is usually required.

Forms of Bonds. These bonds are prepared by the Government and are written on individual or blanket forms. Individual bonds cover the named alien, and blanket bonds cover an unlimited number of aliens, or those named in a list that forms part of the bond. Most of these bond forms are identified by a number or letter designation.

Term of Bond. Some bonds run for an indefinite term, others for a definite term, usually

six or twelve months, but they may be extended for additional periods.

Right of Surety to Terminate. These bonds are not subject to cancellation and there is no law under which the surety may terminate its liability prior to departure of the alien or those covered. In some instances the surety may surrender the alien to Government authorities and thereby obtain release of bond.

Time Limit for Suit. There is no statute of limitations that requires the Government to

sue within a given period for any breach of these bonds.

Forfeiture. As these bonds are penal in nature, generally failure of the alien covered by the bond to comply with all of its conditions and depart from the country at the end of the authorized period subjects an individual bond to forfeiture. For blanket bonds, a fixed amount is forfeited for each alien who disappears or remains in the country illegally.


Rates. Unless otherwise specified, the original premium or minimum on Immigrants bonds is fully earned. Rates on these bonds vary considerably and it is recommended that the U. S. Government Bond section of the Manual (gray pages) be consulted for specific cases and rates thereto, both per thousand per annum and annual minimum.

INTERNAL REVENUE BONDS Distilled spirits, wines, fermented malt liquors, and tobacco are subject to an Internal Revenue or excise tax under the Internal Revenue Code, Rules, and Regulations. Producers of these commodities under Federal law must give bond to guarantee compliance with the regulations and the payment of taxes. Industrial alcohol is not subject to a tax if it is denatured in accordance with regulations, and manufacturers of industrial alcohol are required to give bond to the effect that only alcohol, which has been appropriately denatured, will be sold. Bonds are issuable only on Treasury Department forms, number and descriptive, and the supervising office of the Internal Revenue Service furnishes them.

Distillers Bond. The Distilled Spirits bond, Form 2601, is furnished by distillers, rectifiers, or by a bonded warehouse, to guarantee compliance with laws relating to the manufacture, storage, and transportation of distilled spirits. The principal is obligated to pay all taxes; to prevent the withdrawal of untaxed alcohol from his property; not to mortgage or otherwise permit liens to be placed against his property and, in general, to comply with all the law's provisions.

These bonds require careful underwriting, and aside from the financial stability, the moral integrity of the distillery's officers is of great importance. Others in this general category subject to regulation and to the requirement of the bond include fruit distillers, wine makers, brewers, and those in similar occupations.

Tobacco Manufacturers. The tobacco manufacturer furnishes bond on Form 3070,

which guarantees that he will comply with regulations affecting the manufacture of tobacco products, make proper reports, and pay taxes. Taxes are usually payable by the purchase of Internal Revenue stamps that are affixed to the containers of tobacco products, such as individual packages of cigarettes, boxes of cigars, etc. Cigar manufacturers furnish bond on Form 71, on which the obligation is about the same as that under Form 3070.

Term of Bonds. Some forms cover a single shipment or transaction, while others apply

to the operation of a business, such as a license to operate a distillery, brewery, etc.

Right of Surety to Terminate. Many of these bonds contain a cancellation clause under which the surety may terminate its liability with respect to future acts of the principal by serving advance notice on the Government from 10 to 90 days before the effective date of termination.

Time Limit for Suit. While there are statutes limiting the time within which the

Government must sue the principal for any tax due in accordance with a filed report, those statutes are suspended where the principal fraudulently conceals information relating to the tax. Since fraud is the basis of a majority of cases instituted by the Government, Federal statutes of limitations are rarely held to bar claims on these bonds.


Deterred Tax Hazard. Some bonds when filed allow the principal to defer payment of

excise taxes for a specified period after products have been removed from warehouses for sale. If bonds are not given, taxes must be paid in advance of removal.

Rates. The original premium on any Excise bond is fully earned, except in certain

circumstances noted on pages US-28 of the Rate Manual. Annual minimum for all U. S. Government Excise bonds listed on Manual pages US-29 through US-42 is $100.00 (fully earned) unless a higher minimum is indicated. Since there is a variation of applicable rates and premiums for this class of business, it is recommended that specific rates be checked in the Manual.

CUSTOMS BONDS The Federal bond that generates, by far, the most premium is the federal customs bond. The following is the wording of 19 CFR 113.62 that outlines the requirements for a customs bond:

113.62 Basic importation and entry bond conditions.

BASIC IMPORTATION AND ENTRY BOND CONDITIONS

(a) Agreement to Pay Duties, Taxes, and Charges.

(1) If merchandise is imported and released from Customs custody or withdrawn from a Customs bonded warehouse into the commerce of, or for consumption in, the United States, or under @ 181.53 of this chapter is withdrawn from a duty-deferral program for exportation to Canada or Mexico or for entry into a duty-deferral program in Canada or Mexico, the obligors (principal and surety, jointly and severally) agree to:

(i) Deposit, within the time prescribed by law or regulation, any duties, taxes, and charges imposed, or estimated to be due, at the time of release or withdrawal; and

(ii) Pay, as demanded by Customs, all additional duties, taxes, and charges subsequently found due, legally fixed, and imposed on any entry secured by this bond.

(2) If the principal enters any merchandise into a Customs bonded warehouse, the obligors agree;

(i) To pay any duties, taxes, and charges found to be due on any of that merchandise which remains in the warehouse at the expiration of the warehousing time limit set by law; and

(ii) That the obligation to pay duties, taxes, and charges on the merchandise applies whether it is properly withdrawn by the principal, or by the principal’s transferee, or is unlawfully removed by the principal or any other person, without regard to whether the merchandise is manipulated, unless payment was made or secured to be made by some other person.

(3) Under this agreement, the obligation to pay any and all duties, taxes, and charges due on any entry ceases on the date the principal timely files with the port director a bond of the owner


in which the owner agrees to pay all duties, taxes, and charges found due on that entry; provided a declaration of the owner has also been properly filed.

(b) Agreement to Make or Complete Entry. If all or part of imported merchandise is released before entry under the provisions of the special delivery permit procedures under 19 U.S.C. 1448(b), released before completion of the entry under 19 U.S.C. 1484(a), or withdrawn from warehouse under 19 U.S.C. 1557(a) (see @ 10.62b of this chapter), the principal agrees to file within the time and in the manner prescribed by law and regulation, documentation to enable Customs to:

(1) Determine whether the merchandise may be released from Customs custody;

(2) Properly assess duties on the merchandise;

(3) Collect accurate statistics with respect to the merchandise; and

(4) Determine whether applicable requirements of law and regulation are met.

(c) Agreement to Produce Documents and Evidence. If merchandise is released conditionally to the principal before all required documents or other evidence is produced, the principal agrees to furnish Customs with any document or evidence as required by law or regulation, and within the time specified by law or regulations.

(d) Agreement to Redeliver Merchandise. If merchandise is released conditionally from Customs custody to the principal before all required evidence is produced, before its quantity and value are determined, or before its right of admission into the United States is determined, the principal agrees to redeliver timely, on demand by Customs, the merchandise released if it:

(1) Fails to comply with the laws or regulations governing admission into the United States;

(2) Must be examined, inspected, or appraised as required by 19 U.S.C. 499; or

(3) Must be marked with the country of origin as required by law or regulation.

It is understood that any demand for redelivery will be made no later than 30 days after the date that the merchandise was released or 30 days after the end of the conditional release period (whichever is later).

(e) Agreement to Rectify Any Non-Compliance with Provisions of Admission. If merchandise is released conditionally to the principal before its right of admission into the United States is determined, the principal, after notification, agrees to mark, clean, fumigate, destroy, export or do any other thing to the merchandise in order to comply with the law and regulations governing its admission into the United States within the time period set in the notification.

(f) Agreement for Examination of Merchandise. If the principal obtains permission to have any merchandise examined elsewhere than at a wharf or other place in charge of a Customs officer, the principal agrees to:

(1) Hold the merchandise at the place of examination until the merchandise is properly released;

(2) Transfer the merchandise to another place on receipt of instructions from Customs made before release; and


(3) Keep any Customs seal or cording on the merchandise intact until the merchandise is examined by Customs.

(g) Reimbursement and Exoneration of the United States. The obligors agree to:

(1) Pay the compensation and expenses of any Customs officer, as required by law or regulation; and

(2) Exonerate the United States and its officers from any risk, loss, or expense arising out of principal’s importation, entry, or withdrawal of merchandise.

(h) Agreement on Duty-Free Entries or Withdrawals. If the principal enters or withdraws any merchandise, without payment of duty and tax, or at a reduced rate of duty and tax, as permitted under the law, the principal agrees:

(1) To use and handle the merchandise in the manner and for the purpose entitling it to duty-free treatment;

(2) If a fishing vessel, to present the original approved application to Customs within 24 hours on each arrival of the vessel in the Customs territory of the United States from a fishing voyage;

(3) To furnish timely proof to Customs that any merchandise entered or withdrawn under any law permitting duty-free treatment was used in accordance with that law; and

(4) To keep safely all withdrawn beverages remaining on board while the vessel is in port, as may be required by Customs.

(i) Agreement to comply with Customs Regulations applicable to Customs security areas at airports. If access to the Customs security areas at airports is desired, the principal (including its employees, agents, and contractors) agrees to comply with the Customs Regulations in this chapter applicable to Customs security areas at airports. If the principal defaults, the obligors (principal and surety, joint and severally) agree to pay liquidated damages of $1000 for each default or such other amount as may be authorized by law or regulation.

(j) Agreement to comply with electronic entry filing requirements. If the principal is qualified to utilize electronic entry filing as provided for in part 143, sub-part D, of this chapter, the principal agrees to comply with all conditions set forth in that sub-part and to send and accept electronic transmissions without the necessity of paper copies.

(k) Agreement to ensure and establish issuance of softwood lumber export permit and collection of export fees. In the case of a softwood lumber product imported from Canada that is subject to the requirement that the Government of Canada issue an export permit pursuant to the Softwood Lumber Agreement, the principal agrees, as set forth in @ 12.140(a) of this chapter, to assume the obligation to ensure within 20 working days of release of the merchandise, and establish to the satisfaction of Customs, that the applicable export permit has been issued by the Government of Canada.

(l) Consequence of default.

(1) If the principal defaults on agreements in this condition other than conditions (a), (g), or (i) the obligors agree to pay liquidated damages equal to the value of the merchandise involved in the default, or three times the value of the merchandise involved in the default if the merchandise is restricted merchandise or alcoholic beverages, or such other amount as may be authorized by law or regulation except that in the case of merchandise subject to an exclusion


order of the International Trade Commission under 19 U.S.C. 1337 which has been released before such order becomes final, the obligors agree to pay liquidated damages in the amount specified in the order for failure to redeliver such merchandise.

(2) It is understood and agreed that whether the default involves merchandise is determined by Customs and that the amount to be collected under these conditions shall be based upon the quantity and value of the merchandise as determined by Customs. Value as used in these provisions means value as determined under 19 U.S.C. 1401a.

(3) If the principal defaults on agreements in this condition other than conditions (a) or (g) and the default does not involve merchandise, the obligors agree to pay liquidated damages of $ 1,000 for each default or such other amount as may be authorized by law or regulation.

(4) If the principal defaults on agreements in the condition set forth in paragraph (a)(1)(i) of this section only, the obligors (principal and surety, jointly and severally) agree to pay liquidated damages equal to two times the unpaid duties, taxes and charges estimated to be due or $ 1,000, whichever is greater. A default on the condition set forth in paragraph (a)(1)(i) of this section shall be presumed if any monetary instrument authorized for the payment of estimated duties, taxes and charges by @ 24.1(a) of this chapter is returned unpaid by a financial institution, or if a payment authorized under Automated Clearinghouse (see @ 24.25 of this chapter) is not transmitted electronically to Customs in a timely manner. If the principal defaults on agreements in both of the conditions as set forth in paragraphs (a)(1)(i) and (b) of this section, the measure of liquidated damages assessed shall be as provided in paragraph (l)(1) of this section for a default of the agreements in the condition set forth in paragraph (b) of this section. For purposes of this paragraph, the phrase "unpaid duties, taxes and charges" shall include any appropriate ad valorem fees described in @ 24.23 of this chapter, fees relating to dutiable mail described in @ 24.22(f) of this chapter, and harbor maintenance fees described in @24.24(e)(3) (i) and (ii) of this chapter.

(5) If the principal defaults on agreements in the condition set forth in paragraph (k) of this section only, the obligors agree to pay liquidated damages equal to $100 per thousand board feet of the imported lumber.

Customs Bond Form 301 is required of importers and customs brokers. The amount of the bond penalty is tied to the amount of duties and taxes paid by the applicant in the previous year. If the bond penalty is less than $1,000,000, this bond is written in multiples of $10,000; if $1 million or more, in multiples of $100,000. If the applicant made no imports during the previous year, the penalty is based upon the applicant’s estimate, subject to a minimum of $10,000. As the CFR outlines, the customs broker or importer is required to guarantee several things: 1. The amount of the estimated duty on the items imported and any additional duty. 2. The amount of duty on merchandise that is left in a bonded warehouse or that is removed improperly from a warehouse. 3. That the merchandise will make proper entry into the United States. 4. That any evidence required by U.S. Customs will be provided.


5. That any merchandise that Customs releases on a conditional basis will be redelivered to Customs to determine any of the following: (1) If the merchandise fails to comply with the laws or regulations governing admission into the United States; (2) If the merchandise must be examined, inspected, or appraised as required by 19 U.S.C. 499; or (3) If the merchandise must be marked with the country of origin as required by law or regulation. 6. That any released merchandise will comply with all U.S. admission requirements. 7. That he or she (the customs broker or importer) will see that any merchandise that has been conditionally released is held for final examination. 8. That he or she will pay all necessary Customs officers’ compensation and hold the Customs Service harmless. 9. That any merchandise that is allowed to enter duty-free or at reduced rate will comply with all provisions of such an agreement. 10. That he or she will comply with all security regulations at U.S. airports. 11. That the necessary electronic documents will be filed. 12. That any export documentation required by the Canadian government for a shipment of lumber will be provided. The CFR goes on to describe the penalties to which the importer or customs broker is subject if any parts of the code are violated. Penalties involving merchandise range from the one to three times the value of the merchandise. If the default does not involve merchandise, the fine is $1,000 per offense. If the appropriate taxes and duties are not paid, the fine is the greater of double the taxes or $1,000. Finally, if the default involves lumber imported from Canada, the fine is $100 per 1,000 board feet. The primary purpose of Customs bonds is to assure the payment of import duties and taxes, and compliance with all regulations governing the entry into the United States of merchandise from foreign sources. Where any question exists as to the amount of duty or the admissibility of a shipment, prompt possession may be gained only by posting a bond guaranteeing the return of the goods, if subsequently judged inadmissible, or the payment of whatever duty is imposed after determination of the class and value of the goods. The filing of the proper bond also may enable an importer to postpone payment of duty where he has no desire for immediate possession of his consignment. The moral, financial and credit rating of an applicant for Customs bonds should be determined from financial statements, mercantile reports, and bank and trade investigation. Generally, such bonds may be issued rather freely for reputable and established concerns of sound financial standing.


Term of Bonds. Some bonds are drawn to cover a single entry or shipment; others

apply to a series of entries or shipments, or to the continuance of a business, such as a warehouse under Customs license for a specified period.

Right of Surety to Terminate. Customs bonds are not subject to cancellation by the

surety or principal but remain in force for a specified period, or until the principal has fully complied with the conditions thereof.

Rate and Premium. Unless otherwise stated, all premiums for Customs bonds are flat

for the term and not subject to refund or adjustment upon termination. The initial premium on any bond written for an annual premium is fully earned, but renewal premium for the second or subsequent year on such bond may be adjusted pro rata upon receipt of satisfactory termination evidence.

Where annual premiums for a bond written or to be written for the same principal in the same amount are paid in advance for three years or more there is a 25% discount for the second and third years. Unless a higher minimum is indicated, the annual minimum premium for all U. S. Customs bonds subject to an annual rate is $100.00 (fully earned). Minimum premiums for all other Customs bonds are $100.00.


Admiralty Bonds

The United States District Courts have exclusive jurisdiction in all admiralty and maritime cases. In admiralty, an action may be brought against a ship and the ship may be seized by the United States Marshal and held as security for the claim. The owner may have the ship released by giving other approved security for the claim. The complaint in an action against a ship is known as a libel and the one who brings the action is known as the libellant. In an action against a ship, the libellant may be required to give a bond for payment of costs. When a warrant for the seizure of a ship has been issued, the marshal is required to stay execution of the process, or discharge of the ship if process has been levied, on receiving from the owner of the ship a bond or stipulation conditioned to comply with the decree of the court.

A Type of Judicial Bond Courts of admiralty have jurisdiction over ocean going vessels and all shipping on the U.S. Great Lakes and all inland waterways. The five types of admiralty actions are: suits in rem; suits in personam; criminal cases; limitation proceedings; and prize causes (war time, only). Suits in admiralty are the subjects of complaints called "libels.” The person who brings the complaint is the "libellant" and the subject of the suit is the respondent or defendant. Bonds used in admiralty are called "stipulations" (or, stips). The stips used in admiralty are the subject of this section.

Stipulation for Costs

STIPULATION FOR LIBELLANT’S (Plaintiff’s) Costs - Suit in Rem WHEREAS, a libel will be filed in this court on or about [date], by [name of libellant] against the [name of ship], her engines, boilers, etc. for the reasons and causes in the said libel mentioned; and praying that process may issue against said [name of ship], and the said libellant and {name of Surety] stipulator, parties hereto, hereby consenting and agreeing that in case costs are awarded against the said libellant or said stipulator, the decree therefor, not exceeding the sum of $___ may be entered against them and each of them, and thereupon execution may issue against their and each of their goods, chattels, lands, and tenements or other real estate. NOW, THEREFORE, it is hereby stipulated and agreed for the benefit of whom it may concern, that the libellant herein and the stipulator undersigned [Surety Company] shall be and each of them is hereby bound in the sum of $___, conditioned that they shall pay all costs and expenses which shall be awarded against the said libellant, and/or stipulator undersigned, or any one of them, by decree of this court and in case of appeal by any appellate court.

This bond is required of a plaintiff to start an action (a libel) in admiralty. Such an action is brought to enforce a claim against a ship. The bond is analogous to an attachment bond.


If the indicated bond is for costs only, a slightly different bond is available if the plaintiff is seeking costs and damages.

Stipulation for Value in an Agreed Amount

RELEASE OF SHIP by STIPULATION FOR VALUE -- In Agreed or Appraised Amount WHEREAS, a libel was filed on the _____ day of 20__, by [name of libellant] against [name of ship] for the reasons and causes in said libel mentioned; AND WHEREAS, a claim to said vessel has been filed by [name], and the value thereof has been fixed by agreement at the sum of $____ for the purpose of bonding, as appears by the subjoined consent, and the parties hereto consenting and agreeing that, if the libellant recover, the decree may be entered against them and each of them for an amount not exceeding the above agreed amount, with interest thereon from this date, and that thereupon execution thereof may issue against their and each of their goods, chattels, lands and tenements, or other real estate. NOW, THEREFORE, the condition of this stipulation is such, that if the claimant herein, and the stipulators undersigned, residing at _____ shall abide by all orders of the court, interlocutory or final, and pay the amount awarded by the final decree rendered by the court and any appellate court, if an appeal intervene, with interests (and costs) as aforesaid, then this stipulation to be void, otherwise to be in full force and effect. The total liability under this stipulation shall not exceed $_____.

This bond allows for the release of a ship if the defendant can post a stipulation in an amount equal to the libel. The value of the ship is fixed by appraisal.

Discharge or Release of Libel

DISCHARGE OR RELEASE LIBEL--SPECIAL BOND TO MARSHAL KNOW ALL MEN BY THESE PRESENTS, that _____, claimant, and [name of company], stipulator, having its principal place of business in the city of _____, are held and firmly bound unto _____, Marshal of the United States for the [district] in the sum of [double the amount claimed in the libel] $_____ to be paid to the said _____, Marshal, his successors, administrators, and assigns, for the payment of which well and truly to be made, we bind ourselves, and each of us, our and each of our heirs, executors, administrators, jointly and severally, firmly by those presents. Sealed with our seals and dated this _____ day of _____. WHEREAS, a libel has been filed in the District Court of the United States on the _____ day of _____ by _____, Libellant, against the brig [name of ship], her tackle, apparel, and furniture, for the sum of $_____, on which process of attachment has been issued, and the said brig, her tackle, apparel, and furniture, is in the custody of the Marshal, under the said attachment, and


WHEREAS, _____, claimant of said brig, has applied for a discharge of said brig from the custody of the Marshal, and has filed a claim claiming the said brig, as owner, and has filed a stipulation for the claimant’s costs, pursuant to the rules and practices of the said court.HR>NOW, THEREFORE, the condition of this obligation is such, that if the above bound _____, claimant, shall abide by and perform the decree of this court, then. .

A ship owner may make an advance filing of the above bond to cover the release of any libel that might occur. This bond is written on an annual basis. The rate for this bond is subject to adjustment at the end of the year, based on the number of libels brought against the ship during the year.

Stipulation to Appear

BOND FOR APPEARANCE -- TO MARSHAL ON ARREST OF PERSON KNOW ALL MEN BY THESE PRESENTS that we, X.Y.Z, and _____, stipulator, are bound unto _____, Marshall of the [district] in the sum of $___ (dollars). WHEREAS, a libel has been filed in the District Court of the United States for the [district] on this _____ day of _____ by A.B.C. against the above bound X.Y.Z., in a certain suit, civil and maritime, wherein there is alleged to be due and owing to the said libellant damages amounting to $_____, and WHEREAS, the said X.Y.Z. has been arrested by the Marshal of this District, under process issued pursuant to the prayer of the said libel; NOW, THEREFORE, the condition of this obligation is such, that if the above bound X.Y.Z. shall appear in the said suit before the said District Court of the United States for the [district], on the day of _____, at the Federal Building in the city of _____, and shall at all times render himself amenable to the process of the court during the pendency of the action, and to such process as may be issued, then. . ."

This bond guarantees that the subject of a suit in admiralty (typically a ship owner or captain) will appear in court if sued.

Limitation Proceedings

STIPULATION FOR LIMITATION OF LIABILITY WHEREAS, a libel and petition was filed on the _____ day of _____, by _____ and others, owner of the schooner Marie, praying for a limitation of their liability on account of any loss, damage or injury arising out of a certain collision between said schooner Marie and the steamer Little James, and the value of the interest of the petitioners in said schooner, and her freight pending, has been duly fixed at the sum of _____ Dollars for the said schooner, and _____ for said freight, in all _____ Dollars, as appears from the report of the appraiser, now on file in this


court; and the parties hereto herby consenting and agreeing that, in case of default or contumacy on the part of the petitioners or their sureties, execution for the above appraised amount, with interest thereon from this date, may issue against their goods, chattels and lands; NOW, THEREFORE, the condition of this stipulation is such, that if the petitioners herein and _____ [surety] _____, whose principal place of business is in the City of _____, the stipulator undersigned, shall abide by all orders of the court, interlocutory or final, and pay into the court the above sum of _____ Dollars, with interest, whenever ordered by this court or by any appellate court if any appeal intervene, this stipulation to be void, otherwise to remain in full force and effect.

When a claim for damages is filed against a ship, its owners may do one of three things:

They may transfer their interest in the ship to a trustee for the benefit of the claimants. If they do this, then the claimants have no further right of action against the owners.

They may file for a limitation of their liability to a value to be determined by an appraiser.

They may file the Stipulation for Limitation of Liability bond so that a court may "stipulate" to the value of the ship.

General Average or Average Contribution The principle of "general average" dates back to the time of the ancient Greeks. "Average" is the marine term for "loss.” The principle of "general average" or "average contribution" is a reimbursement guarantee. When a ship is threatened by the "perils of the sea," it is very possible that the crew of the ship will have to jettison some of the cargo in order to save the ship. When this happens, those whose property was saved (including the owners of the ship) must contribute toward the reimbursement of those who were not so fortunate. The loss -- or average -- of the jettisoned property is a "general average."

General Average Guarantee

GENERAL AVERAGE GUARANTEE WHEREAS, certain merchandise was shipped by ABC Carloading Company on the Steamship Empress of Casanovia, sailing from the Port of New York to Galveston and Houston, Texas, and WHEREAS, in the prosecution of her voyage, engine trouble developed during a storm, and upon grounding on a reef she suffered a list, necessitating a jettison of a portion of said cargo, and other expenses, and WHEREAS, said merchandise is subject to certain general claims by way of General Average, or otherwise;


NOW, THEREFORE, in consideration of the delivery from the said Steamship to said ABC Carloading Company of the said merchandise without requirement of a deposit, the undersigned hereby guarantees the payment of all the proper General Average, Salvage, and/or Special Charges for which the said goods are liable, not exceeding the sum of _____ Dollars.

When a shipper arranges for transport of cargo, he or she is required to sign a "general average agreement.” Then, the shipper must make a cash deposit or post a bond guaranteeing payment of his/her share of any general average. In the above bond, the surety guarantees that the shipper will contribute toward any general average.


Miscellaneous Surety Bonds

The bonds described so far in this tab have fallen into certain categories because of various shared characteristics. However, there are other bonds that cannot be classified into any other particular group. These bonds are commonly referred to as miscellaneous surety bonds. Falling into three categories, these bonds are:

Required by law, with the provisions dictated by law;

Required by law, but with the provisions discretionary;

Voluntary with provisions prescribed by the obligee. The obligee on these bonds may be the Federal government, state or local government, or other legal entities. Although their form is not standard, when provided to meet the terms of a statute, they carry the liability required by the law.

This group encompasses all those that cannot be classified into any other particular group. This group comprises the largest number of different type bonds. Some of the bonds that fall into this category include:

Auctioneers’ bonds, guaranteeing the faithful accounting of proceeds of sales.

Brokers or commission merchants bonds, guaranteeing a proper accounting of proceeds.

Insurance agents bonds, guaranteeing indemnity to insurers against any penalties that may arise through the unlawful act of agents.

Lost instrument bonds, guaranteeing the obligees against loss in case original instrument bonds, e.g., negotiable securities, turn up in the possession of others.

Patent infringement bonds, guaranteeing against such infringements.

School teacher bonds, guaranteeing completion of school year contracts upon receipt of vacation pay in advance.

To provide coverage for risks which do not clearly fall within the scope of other classifications. These bonds are generally hazardous. Some of them are financial guarantees, and collateral usually is required. Miscellaneous bonds are normally required by law and must be conditioned as provided by statute, ordinance, or regulation. Others are required by law with conditions discretionary with approving authorities. Still others may be purely voluntary bonds or undertakings with conditions prescribed by or acceptable to the obligee.


INCOME TAX BONDS These are given to guarantee payment of Federal income taxes due or claimed to be due. They are regarded as direct financial guarantees and collateral usually is required. The amount of collateral is based on the amount of the tax if such amount is duly established, or on the amount claimed to be due.

SUBDIVISION BONDS This bond guarantees municipalities that one who undertakes to lay out and develop a subdivision and offer lots for sale shall within a specified period make improvements on the property, such as streets, sidewalks, curbs, gutters and sewers. All bonds of this type are considered direct financial guarantees.

SALES PROMOTION GUARANTEES Guarantees in connection with products or services are an accepted method of sales promotion. Among such guarantees that are frequently supported by Surety bonds are the following:

Long-term guarantees of roofs and roofing materials

Guarantee of the efficiency of specially treated woodwork as a protection against termites

Guarantee to pay loss resulting from the alteration of any check written upon a specified check-writing machine and/or on a specified safety paper

Used car guarantees covering cars sold, to the effect that they will meet certain specifications listed in detail

PATENT INFRINGEMENT BONDS If a merchant sells an article and it turns out to be an infringement of a patent, suit can be brought against the merchant by the patentee to recover damage. Before stocking an article that may be claimed to be an infringement of a patent, the merchant may require of the manufacturer a bond of indemnity against patent infringement claims.

BLUE SKY BONDS There are laws in many states regulating the sale of securities within the state. These laws are known as Blue Sky Laws, because they are designed partly to prohibit the sale within the state of "blue sky" or worthless securities, thereby preventing unscrupulous stock and bond salesmen from preying on the public. In some states a dealer in securities is required to give bonds to the state to indemnify purchasers of securities from the dealer against loss in the event false misrepresentations, as an inducement to purchase, are made by the dealer or any salesman employed by him.


There are two types of applicants for these bonds:

A dealer regularly engaged in the business of selling standard securities which have been registered with the Securities and Exchange Commission, and

A dealer who proposes to offer for sale the stock of a company which was incorporated in that state and which, because the stock is to be offered for sale only within that state, is not required to register the stock with the S.E.C.

Experience on bonds of the first class is generally satisfactory, since they are written for established dealers with good standing and reputation, and with substantial capital invested in the business. Bonds of the second class are regarded as very hazardous and usually are declined.

UNDERWRITING

Miscellaneous Forms Not Standard. Flexibility is necessary to meet the requirements of diverse laws and regulations or the needs of various obligees. However, where bonds are given to comply with the terms of a statute, ordinance or regulation, all such bonds must carry whatever liability the law imposes on the principals and sureties, and to this extent such bonds may be regarded as standardized.

Surety's Right of Subrogation. The guarantee covered by these bonds may be the

primary obligation of the principal, or the surety may be subject to direct suit in the event of a default. In any event, when a loss is sustained by the surety it may look to the principal for reimbursement.

Right of Surety to Terminate. A bond required by law does not ordinarily contain a

cancellation clause. In some states, however, there are statutory provisions under which the surety may by following a prescribed procedure effect termination of liability for the future acts or defaults of the principal. A cancellation clause, nonetheless, may be incorporated in certain statutory as well as non-statutory bonds.

Term of Bond. The term or period of the bond must correspond to the term or period

required by law in the case of statutory bonds, or as required or accepted by the obligee in the case of non-statutory bonds. In either case the right to file claims under the bond for losses sustained while the bond was in force continues for various periods as set out in the bond or as required by law.

Rate and Premium. Unless otherwise specifically stated, the original premium on all

Miscellaneous bonds is fully earned, but renewal premiums are adjusted pro rata for short term. All minimums are fully earned. Annual minimum for all Miscellaneous bonds is $100.00 (fully earned) unless a higher minimum is indicated. Since there is a variety of Miscellaneous bonds and it is a wide field, it is recommended that for specific bonds the Manual be consulted (blue pages) for appropriate rates.

Advance Payment of Premium. Where annual premiums for a Miscellaneous bond

written for the same principal in the same amount are paid in advance for three years or more the following discounts apply: For three years--discount total premium 25%.


Itinerant or Temporary Merchants, Transient Photographers, Vendors, Peddlers, Etc.

WHEREAS, the above bound _____, Principal, has made application for a license to engage in the business of _____, within the City of _____, pursuant to the provisions regulating such occupation (or pursuant to such and such a code or ordinance adopted, _____).

NOW, THEREFORE, the condition of this obligation is such that, if the said Principal shall fully and faithfully comply with all the laws or ordinances relating to the said business or occupation so licensed (or comply with the said code), or in the event of failure to so comply shall pay to the said city any and all penalties which may lawfully be assessed against (him, her, or it) for such failure, together with costs of prosecution, (and -- if vending -- shall use honest weights, measure, and grades, make accurate representations as to quality or class of merchandise sold), and shall well and truly account for and deliver to any person legally entitled thereto any goods, wares or merchandise, article or thing which may come into his hands through his business as such _____, or in lieu thereof shall well and truly pay in money to such person or persons reasonable value thereof...

Merchants who travel must often post this bond with local authorities. The government may simply require the principal’s "honesty and faithful discharge" of duties. However, it may also require that the principal guarantee any checks written in that locale by the principal.

Public Amusements -- Theaters, Dance Halls, etc.

WHEREAS, the above Principal, _____, has applied to the City of _____ to maintain a _____ at _____ within the city during the year ending _____. . .

NOW, THEREFORE, the condition of this obligation is such that, if the said Principal is granted such license and, if the said Principal shall fully and faithfully comply with all State laws and the rules, regulations or ordinances of the said city pertaining to such business, and shall at all times maintain an orderly establishment, pay all fees or penalties which may lawfully be imposed upon said Principal, and shall indemnify and save harmless the said city from any and all liability, direct or indirect, resulting from any negligence or failure on the part of the principal, his agents or employees, to observe and comply with all said laws and ordinances in the operation or maintenance of said business or concession.

The public amusement bond guarantees that such businesses will comply with all local ordinances and regulations. It also guarantees that the business will "maintain an orderly establishment.” Sometimes this bond allows for direct third-party action against the principal. If it also guarantees the payment of taxes and license fees, the Suretymaster says that it must be "underwritten with more care.” The agent is also admonished to check on the "reputation, financial responsibility, and permanence in the neighborhood" of the applicant.


Wholesale Dealers

THE CONDITION OF THIS OBLIGATION IS SUCH that, whereas, the principal, under the provision of Laws of the State of _____ relative to Wholesale Produce Dealers, has made application in writing to the Commissioner of Agriculture for license as dealer at wholesale is _____ and, as a condition to the granting of such license, is required by the Commissioner to give bond to the state in the amount named herein.

NOW, THEREFORE, if the principal, being so licensed, shall faithfully perform the duties imposed upon a licensed dealer at wholesale, and shall observe all the laws and regulations relating to the carrying on of such business within the state, and shall make payment, when due, of the purchase price of all produce purchased, and shall promptly report all sales as required by law to persons consigning produce to such dealer for sale on commission, and shall promptly pay to the person entitled thereto the proceeds of such sales, less lawful charges, disbursements and commissions, and shall make prompt settlement and payment of all claims and charges due the state for services rendered or otherwise, under any existing law, rule or regulation, then this obligation shall be void, but otherwise shall remain in full force and effect.

It is understood in accordance with the provisions of the statute, that this bond shall be effective only when notice of default of the dealer is given the Commissioner as defined by statute, and that it shall not cover transactions wherein a voluntary extension of credit has been given by the seller beyond the due date; and that this bond will expire on _______.

Most states require wholesalers who deal in farm products to obtain this bond for the protection of the seller (or consignor). It guarantees that the consignor will be paid and it guarantees that all appropriate reports will be filed with the necessary government agencies.


Miscellaneous Types of Bonds

Assigned Accounts Bonds

WHEREAS, under the terms of an assignment dated ____, 20__, which assignment by reference is made a part of this bond, for value received or to be received, and as collateral security for the payment of any and all indebtedness, obligation or liability of any kind whatsoever, due or to become due, now existing or hereafter contracted, the undersigned Principal has sold, assigned, transferred and set over to the Obligee _____ any and all accounts, accounts receivable and moneys now due or which may become due, as shown by the accompanying schedule, and WHEREAS, the undersigned Principal has warranted and represented: (1) that the accounts receivable so scheduled are genuine and enforceable, (2) that there is due and owning from the parties listed on said schedule at least the amounts set opposite their names respectively, (3) that there are no offsets or counterclaims with respect to said accounts receivable, (4) that the goods, services or advances represented by said accounts receivable have been delivered, rendered or made and adopted, (5) that the undersigned Principal has not heretofore and will not hereafter assign said accounts receivable or any part thereof to any other party, and WHEREAS, the undersigned Principal has authorized and empowered the Obligee _____, its successors and assigns, at its or their election but without any duty or obligation so to do, in the name of the undersigned or otherwise, to demand, aquittance for, and to prosecute or discontinue any suits or proceedings in respect of, any and all said accounts receivable or any part thereof. NOW, THEREFORE, the condition of this obligation is such that, if the undersigned Principal, his successors and assigns, shall carry out and faithfully keep all the terms, conditions, covenants, and agreements of the said assignment, then. . .

When accounts receivable are assigned to a collector, the collector wants assurance that he or she will be paid if the debtor does not pay. Ranging in price from $10 to $30 per thousand, the principal makes five different guarantees regarding the accounts in question:

That the accounts assigned are valid -- "genuine and enforceable”;

That the amounts shown as due to the principal are correct;

That no one else has made a claim to these amounts;

That the principal did, indeed, perform the services or deliver the goods represented by the amounts due; and

That the principal will not assign these accounts to anyone else.


The collector needs to know that if the previous holder of the debts is paid anything toward those debts, that money will be turned over to the collector. A bond may be written for this purpose.

Finally, in many such situations the money collected is deposited with an independent agency. A bond may be obtained guaranteeing the honesty of such an agency.

Auctioneers’ Bonds

KNOW ALL MEN BY THESE PRESENTS: That _____, of _____, as Principal, and _____, a corporation duly licensed to do business in the state of _____, as Surety, are held and firmly bound unto the State of _____ in the penal sum of $_____, for the payment of which, well and truly to be made, we bind ourselves and our legal representatives, jointly and severally by these presents. THE CONDITION OF THE ABOVE OBLIGATION IS SUCH, That whereas, the said Principal is being licensed as an Auction Clerk [Auctioneer] by the Public Service Commission of the State of _____ as provided by Section _____ of the _____ Code, as amended, and all laws supplementary and amendatory thereto for the calendar year 20__. NOW, THEREFORE, if the said Principal shall, during the license period beginning on the _____ day of _____, 20__, and each successive license year until cancelled as provided herein, auction sales in the State of _____ under his license fairly and legally, and shall injure no person by improper clerking of such auction sales, then this obligation to be void, otherwise to remain in full force and effect. The liability of the Surety hereunder shall in no event exceed the penalty of the bond and no liability shall accumulate from year to year. This bond may be cancelled by the Surety upon 30 days’ notice to the Public Service Commission, said cancellation not, however, affecting the liability of the Surety as to any liability which shall accrue prior to such cancellation, unless sooner cancelled by order of the Public Service Commission.

When an auctioneer is hired to liquidate an estate (whether due to death or bankruptcy), the principal in the arrangement will require evidence of the auctioneer’s honesty. Bonds covering the faithful accounting of proceeds from sales are divided into two types: those covering sales of bankruptcy estates and bonds covering all other sales. In addition, the principal may wish to guarantee the amount of money to be obtained from a sale. A bond is available to guarantee that the net proceeds of the sale will not be less than the amount stipulated.

Dependent Children


NON-RESIDENT DEPENDENT CHILDREN (Massachusetts) WHEREAS, the above bounden _____, Principal, has made application to the Department of Public Welfare of the Commonwealth of Massachusetts for a permit to bring _____, a non-resident minor child into the Commonwealth for the purpose of _____, and WHEREAS, said principal has made such written application for the forms supplied by said Department of Welfare and accompanied same by this bond (or blanket bond if required for more than one child) in the penal sum of $_____. NOW, THEREFORE, if all statements contained in such application are true, in substantial particulars, and if such child becomes a public charge during (his or her) minority and shall be removed from the state not later than 30 days after notice from the Department, and if such child shall be removed from the state immediately upon his or her) release from any penal or reformatory institution or training school to which he has been committed, within three years of (his or her) arrival within the state, for juvenile delinquency or crime, and if such child shall be placed or boarded under such agreement as will secure (to him or her) a proper home and surroundings, and as will render (his or her) custodian responsible for (his or her) proper care, education and training, under adequate supervision and subject to annual visit by agent, and if such reports relative to the child shall be made to the Department as it may request, then. . .

Often the placement of orphans, foster children, or other wards of the state is handled by a private organization. A bond may be purchased to guarantee compliance with all laws regulating the placing of such children.

Divorce Proceedings

In a divorce, the children are often the subject of much argument and infighting. Many times one parent may have temporary custody and the other parent is awarded custody in the divorce decree. A bond is available to assure that the children are returned to the parent who is given custody.

Feeding of Stock in Transit

Railroads and other common carriers transport cattle and other stock. As these are sometimes long trips, the cattle will need food and water during the course of the trip. This bond guarantees that the carrier will perform this operation.

Indemnity Bonds Several types of bonds are available:

Contractors’ indemnity bond.

Repossession by lien holder of property.

Transfer agents -- indemnity to.


Lease Bonds.

Contractors Indemnity Bond

CONTRACTOR’S INDEMNITY TO LENDER WHEREAS, the above bounden Principal has been awarded a contract by the municipality of _____, in the State of _____, to construct a _____ within the corporate limits of said city, and WHEREAS, because of the inability of said municipality to supply funds from time to time for the payment of such work as has been completed, due to its regulation prohibiting issuance of warrants or bonds to pay for such improvements until their completion and acceptance by its governing body, it has been necessary to look elsewhere for such funds, and WHEREAS, the said Obligee has entered into an agreement with the Principal, among other things, to advance such monies, from time to time, totaling in all the aggregate sum of $____ for the purpose of constructing and completing such project, and has agreed to accept in reimbursement of its loan the warrants or bonds, when issued, of said municipality at the price agreed upon in said agreement, a copy of which agreement is by reference made a part hereof, and WHEREAS, the said Obligee has agreed to accept as security for said loan and advance of funds, and for other obligations of said Principal to said Obligee thereunder, an assignment of said contract, which assignment has been made, including all proceeds therefrom to which said Principal, as contractor may now or hereafter be entitled by virtue of work done thereunder, together with all liens and evidences thereof, the giving of this indemnity bond, and the consideration of the full and complete performance of said work and construction by the Principal as contractor. NOW, THEREFORE, the above conditions of this obligation are such that, if the said Principal shall indemnify and save harmless the said Obligee from any and every pecuniary loss or damage which it may sustain through having entered into said loan agreement, exclusive of that incurred as a result of the acceptance, redemption, or disposal of said warrants or bonds taken at discounted figures as reimbursement for said loan, and which loss arises by reason of or in consequence of the failure of the Principal fully to perform and complete the said work or improvement, according to plans and specifications and in compliance with the terms of his contract therefore, or his failure to pay in full for all labor, materials and other claims which, under the State of _____ or any County or Municipal ordinance or regulation, may or might constitute a charge or claim against the monies, or other evidences of indebtedness or liens to be paid or issued in payment for the performance of said work or improvement or a prior right thereto, then this obligation shall be null and void; otherwise to remain in full force and effect. THE FOREGOING, HOWEVER, IS SUBJECT TO THESE FURTHER CONDITIONS: 1. The Surety consents to the said assignment by the Principal to the Obligee and recognizes the right of the Obligee to receive all payments, whether in money or other evidences of indebtedness or lines accruing upon said contract of said Principal for such work of improvement. The Surety also agrees that the Obligee’s right to receive such proceeds shall


have priority, up to the amount of said loans and advances, interest, discounts, costs, damages and liabilities, over its lien or to such proceeds by reasons of its being surety upon any bond of the Principal in connection with his contract for said work of improvement. 2. The Principal agrees to complete said work of improvement within the time fixed in his contract therefor, or legal extension thereof. 3. Upon completion of said work of improvement pursuant to the terms of the contract of Principal, as contractor, and the delivery to the Obligee of the money or other proceeds of said contract, the obligee shall first pay to itself, from the amount or amounts due under said written agreement the total amount of loans or advances made to the Principal under such written agreement, with interest thereon and costs and expenses. The balance of the amount due the Principal under said contract shall be paid to or on the order of the Surety. 4. All advances made to the Principal under said contract shall be made by said Obligee only upon written authorization on behalf of the Surety signed by _____. 5. The Surety shall not be liable under this bond to the Obligee, unless said Obligee shall make payments to the Principal strictly in accordance with the terms of its agreement with the Principal, and shall perform all the other obligations to be performed under said agreement at the time and in the manner set forth. IN WITNESS WHEREOF, the Principal and the Surety have caused this bond to be executed at _____, this _____ day of _____, 20__.

A contractors indemnity bond is written with a performance bond when an additional indemnity bond is required of the contractor on the same project. Many times a city cannot raise money for a project until that project is actually completed. Therefore, the city cannot advance funds to the contractor for the project, and the contractor must look elsewhere for funding. After the contractor secures funding, he or she obtains the above bond to guarantee repayment to the lender, upon completion of the project.

Indemnity To Transfer Agents

INDEMNITY TO TRANSFER AGENT Know all men by these presents; that _____ (Surety), hereby agrees to indemnify _____ (Obligee), and hold said Obligee harmless to an amount not exceeding $_____ from and against any and all loss, damage, liability, cost and expense, sustained and incurred and discovered subsequent to noon of the date hereof and prior to the termination of this indemnity agreement as hereinafter provided, caused by or arising from the cancellation of any stock certificate and the issuing of another therefor in a different name, or caused by or arising from the transfer of stock to a name other than that filled in the assignment, at the request of (a) a firm having membership in the New York Stock Exchange, (b) a firm having membership in the New York curb Exchange and in its New York Clearing House, (c) any bank or trust company or (d) any private banker or investment banker for the cancellation of said certificate and issue of a new one, or change in the name of the assignee named in the assignment, is based upon an alleged error or mistake in the registration or in the assignment, and the endorsement of the


party appearing on the face of the certificate, or an assignment by the assignee named in the assignment, is not obtained. PROVIDED, ALWAYS, Liability of the surety shall not attach hereunder, 1. Unless as a condition precedent to the cancellation and reissue of a stock certificate, or change in the assignment, as aforesaid, the Obligee shall have taken and shall hold an agreement of indemnity from the party making such request, and the party making such agreement fails to indemnity the obligee on demand. Such agreement of indemnity where the alleged error or mistake is in the registration, may be in the form of a letter, and where the alleged error or mistake is in the name of the assignee, such agreement of indemnity may be in the form of an endorsement on the assignment guaranteeing the change or the assignment as changed. 2. Unless the Obligee within 30 days after any claim is made against the Obligee, which may result in a loss within the terms of this indemnity agreement, shall have given notice to the Surety in writing of such claim. The occurrence of any loss or losses hereunder and subsequent payment of such loss or losses shall not reduce the amount of the indemnity as to any other loss or losses hereunder whether occurring before or after the loss or losses is paid; provided, that in no event shall the Surety be liable on account of any loss or series of losses caused by the same error or event, for a greater sum than $_____; and provided further, that upon every sum so paid as a loss hereunder, the Obligee shall pay to the Surety, upon demand, an additional premium computed pro-rata from the date of notice of loss as aforesaid to the end of the current premium year. This indemnity agreement shall terminate as to subsequent transactions (a) 30 days after the receipt by the Obligee of a written notice from the Surety of its desire to terminate this agreement, or (b) immediately upon the receipt by the Surety of a written request from the Obligee to terminate this agreement; but the Obligee shall have 12 months after the date of cancellation during which time losses prior to cancellation may be discovered and claims therefore filed.

In a stock transfer, often the stock is transferred to the wrong person or the certificates are cancelled and new ones issued. In either case, the person or organization acting as transfer agent may be held liable. Such a bond indemnifies transfer agents for these losses.

Lease Bonds

LEASE BOND -- GUARANTEEING PAYMENT OF RENT WHEREAS, the said Obligee, by indenture of lease dated _____, 20__, and in consideration of the rents, covenants, and agreements contained therein, to be paid and performed by the said Principal, has leased unto said Principal the certain premises located at _____, and more fully described in said lease, for a term of _____ years from the _____ day of _____, 20__. NOW, THEREFORE, the condition of this obligation is such that, if the said _____ and his (their) executors, administrators, successors, and assigns, during the currency of the said lease, shall well and truly pay, or cause to be paid, the rents, upon the respective days specified therein for


the payment thereof, and shall duly perform and observe all and singular covenants and conditions therein to be performed and observed on the part of said lessee principal, his heirs, executors, administrators, successors and assigns, including the return of the property in the condition in which it was at the time of the said principal taking possession.

The above bond guarantees the payment of rent. Other such bonds guarantee the performance of other requirements in a lease, except requirements to build.


LOST INSTRUMENT BONDS To guarantee the payment or fulfillment of the obligation represented by a lost instrument such as a certificate of stock, a mortgage note, a check or a Life insurance policy to the rightful party and to hold the one who pays the obligation free from loss if the lost instrument is later recovered. For rating purposes, Lost Securities bonds are divided into two groups, fixed penalty bonds, and open penalty bonds. When a check, draft, Life insurance policy, certificate of membership, warehouse receipt, ticket, certificate of stock, trust deed, mortgage note or other instrument of like character is lost, stolen, or destroyed, the owner will attempt to obtain a duplicate. However, before issuing the duplicate, the originating company will require a bond of indemnity, a Lost Securities bond, to protect it against loss, costs, damages or expenses should the original instrument be subsequently presented. Issuers of securities are always willing to issue duplicate or new securities, or pay the current value of the lost security, upon the filing with them of a corporate bond indemnifying them against loss resulting from such action. There are three parties involved in the transaction represented by a Lost Securities bond:

Obligee is the corporation or individual who issued the instrument and who will be called upon to fulfill its conditions on maturity.

Principal is the corporation, individual or individuals who had possession as owners or trustees of the instrument at the time of its loss or destruction.

Surety is the company that issues the Lost Instrument bond.

CLASSES OF INSTRUMENTS There eight categories of securities or instruments to which Lost Securities bonds may apply:

Class A includes lost Life insurance policies, certificates of membership in fraternal and beneficial orders or mutual associations containing accident or death benefits, adjusted service certificates, certificates of membership in boards of trade, stock exchanges and similar organizations.

Class B covers U.S. Government Cheeks and Postal Money Orders, checks of a state, county or other public body in the U.S.A., warehouse receipts, pawn tickets, steamship tickets and similar records of title to or lien against personal property.

Class C embraces lost common stock or equivalent security such as certificates of beneficial interest and trust certificates.

Class D includes lost interest coupons, or non-interest bearing certificates, or securities on which the right to interest or dividends has ceased such as drafts, warrants or certificates of indebtedness which do not bear interest; certified checks; cashier’s


checks; bank drafts after acceptance; certificates of deposit on which interest has ceased or checks on which payment has stopped.

Class E applies to lost interest-bearing government securities of the U.S., any state or municipality and foreign governments.

Class F includes lost interest-bearing, securities other than government obligations such as mortgages, mortgage certificates, mortgage notes and trust deeds, whether or not current interest is in default.

Class G applies to lost preferred stocks and lost building and savings and loan association share.

Class H includes lost savings bank books.

UNDERWRITING The writing of these bonds depends upon three important factors:

Character of the personal applicant or reputation of the corporate applicant. Great reliance must be placed on the applicant's affidavit and statements concerning the disappearance of the missing security.

Degree of negotiability of the missing instrument. Any lost instrument which has been endorsed or assigned in blank, is payable to bearer, or is transferable by delivery without endorsement, constitutes a hazardous risk and normally should be avoided in the absence of mitigating circumstances such as very strong evidence of the actual destruction of the missing security.

The element of time. The longer a security has been missing, the less likely it is that it will reappear. In many instances where the security has been missing but a short time, the company will write the required bond if the principal will agree to deposit with the Surety the replacement security or proceeds from the missing security for an agreed time. Otherwise a declination might be necessary.

There are two types of lost securities bonds, for rating purposes: fixed penalty and open penalty.

Fixed penalty bonds are used when the penalty or limit is stated in the bond and is not in excess of two times the face value of the lost securities or instruments. When the instruments are without face value, the penalty must not exceed two times the last market quotation.

Open penalty bonds are used when no penalty is stated on the bond or the penalty is in excess of that permitted under the fixed penalty bond -- that is, when the penalty is over two times the face value, or if without face value, over two times the last market quotation. Those bonds should be of the open penalty type that give to the obligee in its discretion the right to demand a new bond in a different or greater amount if the security of the first bond seems to the obligee to be insufficient.


LOST SECURITIES BOND AND AFFIDAVIT

WHEREAS, the said _____ (bank) _____ did on the _____ day of 20__, issue _____ (cashier’s check, check, etc.) #_____, in the sum of _____ Dollars ($__) to _____, which said _____ alleges has been lost, mislaid, or destroyed, and... WHEREAS, the said _____ is desirous of having the _____ (bank) _____ issue a duplicate cashier’s check _____ in lieu thereof and desires to indemnify the said _____ (bank) _____ therefore. NOW, THE CONDITION OF THIS OBLIGATION IS SUCH that, if the above bounden _____, his heirs, executors, administrators, successors or assigns, shall and do, from time to time and at all times hereafter, well and sufficiently indemnify and save harmless the said _____ (bank) _____ its executors, administrators, successors, or assigns, of and from and against the said lost cashier’s check _____ and of and from all costs, damages, and expenses that shall or may arise therefrom, including attorney’s fees and court costs incurred in defending any suit based thereon, and also deliver or cause to be delivered up said lost instrument, and when found, to be cancelled. AFFIDAVIT KNOW ALL MEN BY THESE PRESENTS: That I _____, of _____ County of _____, being duly sworn on oath, depose and say that I am the sole owner of a certain _____ numbered _____ of the _____ standing in my name on books of said _____. That on or about the _____ day of _____, 20__, said _____ was lost, mislaid or destroyed in the following manner, to wit: _____ That I have made due and diligent search for said _____, but have not found same; that I have not sold, assigned, transferred, hypothecated, endorsed, or in any way disposed of the same, or any part thereof, in any manner whatsoever. That I have requested the _____ to issue to me a duplicate of said _____ which the _____ is willing to do if I will give it a good and sufficient bond of indemnity; that I have requested the _____ Surety Company to become my surety on said bond, and in order to induce the said _____ to become my surety on said bond, I have made these representations, and intend that the said _____ Company _____ shall rely solely thereon in becoming surety on said bond.

Lost instrument or securities bonds are usually required when any person or entity has lost, mislaid, or destroyed a valuable paper and wishes to secure a duplicate or to collect on it or to enforce some right connected with it. Common examples are stock certificates, life insurance policies, certificates of membership in organizations with insurance value, bills of lading; warehouse receipts bonds, building and loan association shares, etc. In most cases, the organization issuing the instrument will not pay or issue a duplicate or surrender the property secured without receiving a lost instrument bond.


The bond is a simple guaranty that the principal (person bonded) will reimburse the obligee (issuer of stock certificate or other instrument) for any loss it may suffer or expense it may be put to should the original instrument come to light and someone else claim a right under it.

RATE AND PREMIUM

Rates are quoted on the basis of each $1,000 of penalty and apply for the term of the bond rather than on an annual basis. If lost instrument or securities are found, property surrendered and the bond cancelled within six months of issuance, one-half of premium is refunded.

The rates for fixed penalty bonds range from $10 to $20 per $1,000 of penalty depending on the class. Open penalty bonds premiums are computed on the face value of the lost securities, if there is a value. If not, than the last market quotation is used and the maximum premium charge is $60 per $1,000. However, in no event may the premium for a fixed penalty bond exceed the cost of an open penalty bond in the same case. The minimum premium is $10.

Other Miscellaneous Bonds

Further categories of miscellaneous bonds include:

Maritime administration: Bonds required in connection with change of registry or flag, as well as those associated with the sale of vessels.

Mortgages: Bonds that will indemnify a bondholder trustee for satisfaction, cancellation, or destruction of a matured or paid mortgage.

Patent infringement: Guaranteeing against the infringement of a patent.

Private patients: Support patients in asylums or hospitals.

Schoolteachers: To indemnify a school and assure there will be a person to complete the school year, upon receipt by a teacher of vacation pay in advance.

Students’ bonds: Issued to colleges or universities to indemnify against damage to property and to guarantee payment of tuition and other fees.

Union bonds -- wage and welfare: available to guarantee the payment of wages, maintenance of union wage scale, and continued contributions by the employer to welfare funds.


Department of Transportation Bond Requirements

Brokers, Motor Carriers, and Other Shippers Under the current regulations of the Department of Transportation (DOT), bonds (or some other proof of financial responsibility) are required from the following persons and business organizations connected with interstate transportation of persons and property:

Brokers of interstate shipments, guaranteeing faithful performance of contracts.

Motor carriers, as a substitute for cargo liability or automobile bodily injury liability and property damage liability insurance, or for permission to be a self-insurer.

Other shippers, guaranteeing payment for loss of cargo, similar to the requirement for

motor carriers.

Brokers The United States Code defines a transportation broker as "a person, other than a motor carrier or an employee or agent of a motor carrier, that as a principal or agent sells, offers for sale, negotiates for, or holds itself out by solicitation, advertisement, or otherwise as selling, providing, or arranging for, transportation by motor carrier for compensation." Brokers handle a large volume of long-haul truck business. In general, there are two types. The first, common in the East, is purely a broker, soliciting freight and routing it over truck lines. More prevalent in the Middle West is the operator of a terminal or warehouse that secures loads, especially return loads, on a commission basis for truck men who patronize his terminal. These firms are brokers from the viewpoint of the DOT and are required to be bonded. Some car loading companies operate through brokers, but others directly solicit or arrange for truck shipments. Those that do so are also subject to the bonding requirements of the DOT. Since these requirements apply to brokers of passenger transportation as well as freight, agencies that sell interstate bus tickets are also required to furnish bond, provided they are independent agencies and not operated in connection with a licensed bus line.

Bond Required

Under present regulations brokers are allowed to operate only upon furnishing bond or personal security in the amount of $10,000, under a prescribed form, guaranteeing financial responsibility and ability to perform their contracts. This bond is a financial guaranty and consequently, surety companies are careful in their underwriting. Usually, detailed information regarding the financial condition, methods, and reputation of the broker is required. Collateral security may sometimes be required.


The Transportation Department reserves the right to approve the surety companies providing such bonds. The surety company must be on the approved list of the United States Treasury Department.

Motor Carriers and Other Shippers DOT regulations require all licensed carriers to have "primary security coverage," written on specified forms. Primary security coverage is defined in the Code of Federal Regulations as "public liability coverage provided by the insurance or surety company responsible for the first dollar of coverage.” These bonds guarantee that the carrier will pay all judgments rendered against it for injury to persons or damage to property of others, or for loss or damage to cargoes, as the case may be, up to the designated limits. The minimum limits on the bond or insurance policy vary according to a number of factors, as outlined in the Code. For vehicles under 10,000 pounds GVWR (designated as "small freight vehicles"), the minimum required is $300,000. For large freight vehicles, the limit is dependent upon the type of cargo to be carried. If carrying what the act defines as "nonhazardous" property, the required limit is $750,000. Shippers of "hazardous" material must have a limit of $5 million. If oil, hazardous waste, or hazardous materials that are not defined elsewhere in the act, are being carried, the carrier needs a limit of $1 million. The final category of property includes explosives, poison gas, and radioactive materials. The required limit for this category is $5 million. Two classes of passenger carriers are described, those with a seating capacity of 15 or less and those that seat more than 15 people. For the first category, the required minimum limit is $1.5 million; for the second, $5 million. The Department of Transportation in Washington no longer furnishes copies of these bonds. They may be obtained from the home offices of most surety companies.


REINSURANCE AND COSURETYSHIP It is common practice among the companies, on their surety lines as well as their insurance lines, to retain for their own account comparatively small portions of exposures on single risks, and to reduce the net exposure by means of either reinsurance or cosuretyship.

REINSURANCE Reinsurance is a procedure whereby one surety, having assumed a large risk through the issuance of a bond, shares both the premium and the risk with other sureties. The primary purpose of reinsurance is to render to a surety company the assistance it needs in order to absorb an exceptional exposure and exceptional loss. Reinsurance provides the necessary cushion for the surety to handle large risks and at the same time preserve safely its essential reserves and stability. The company originating the bond, and passing along a portion of its liability to other sureties, is called the reinsured. Each company that accepts from the reinsured a portion of its liability and expects compensation in the form of premium participation is called a Reinsurer. Reinsurance may be on an excess or share basis. If on an excess basis, the reinsurer undertakes for an agreed premium to reimburse the reinsured for that portion of any loss, which is in excess of a stipulated amount. If the reinsurance is on a share basis, the reinsurer receives from the reinsured a pro rata share of the premium and agrees to pay to the reinsured a corresponding pro rata share of any loss under the bond. Almost all surety reinsurance is on a share basis. When a bond is written by one surety and reinsured on a share basis by other companies, the reinsured or the company writing the bond, is solely liable to the obligee for any loss, and the reinsurers are obligated to reimburse the reinsured for their respective proportions of the loss. If any of the reinsurers should become insolvent, the loss would fall on the reinsured. If, on the other hand, the reinsured should become insolvent, the reinsurers would nonetheless be liable for their respective shares of the loss.

FACULTATIVE AND TREATY INSURANCE

Reinsurance may be either facultative or treaty reinsurance. Facultative reinsurance is on a free, non-obligatory offer-and- acceptance basis. A company may choose to accept a specific portion of the risk or decline it. This form has the advantages of controlled net retentions by the reinsured and the favoring of selected reinsurers. It also permits the reinsurer to do its own selective underwriting, and accepting or declining risks according to its judgment. Treaty reinsurance, on the other hand, is a method whereby the originating company automatically binds the treaty company for a specific amount of the risk. Automatic treaties ordinarily require that the primary company place an agreed proportion of every risk, of the type that is the subject of the treaty, with the treaty carrier, which is normally an exclusively reinsurance company.


COSURETYSHIP Cosuretyship is a procedure whereby two or more companies jointly become sureties on a bond. The distribution of liability among several sureties through the medium of cosuretyship is much simpler than reinsurance. A Surety bond normally is executed by the principal and the surety, but in cosuretyship, the bond is executed by two or more sureties instead of a single surety, and the obligee has a direct right of action against each of them. Generally, each cosurety commits itself to the full amount of liability under the bond. Cosuretyship is particularly effective and desirable in construction contracts of unusually large size, where one surety either is unwilling or is not permitted by state or Treasury Department limitations to accept the full liability.

LIMITED OR UNLIMITED

Cosuretyship may be either limited or unlimited. It is unlimited if each company signs the bond as surety without any limitation upon the amount of its liability other than the penalty of the bond. In that case, any one of the cosureties can be required to pay the total loss. Cosuretyship is limited when each of the companies, by terms of the bond, limits its liability to a specified amount, and the aggregate of the amounts for which the several companies bind themselves makes up the total suretyship required. Limited cosuretyship is generally acceptable on all bonds required by law, so that the limited rather than the unlimited form appears to be preferable to the sureties and is much more commonly used.

UNDERWRITING Reinsurance and cosuretyship are usually handled by home office underwriters, with branch office personnel taking care of many of the details. Agents ordinarily play no direct part in arranging reinsurance or cosuretyship. This brings up the question of how far the surety is permitted to go in reinsurance or cosuretyship. There are certain limitations.

TREASURY LIMITS

Of considerable importance are the qualifying limits imposed upon the surety by the United States Treasury Department. A surety company which desires to engage in the bonding business outside the state of its incorporation must be licensed in all other states in which it proposes to operate. Also, to be an acceptable surety on bonds in favor of the United States, it must qualify financially under regulations of the Treasury Department. That department annually issues a list of qualified companies, the underwriting limit of each, the states in which each is licensed and where each has appointed process agents or persons


empowered in the respective Federal judicial districts to accept service of legal process. Sometimes process agents are State Insurance Commissioners. The underwriting limit is frequently referred to as the "qualifying power," which is equal to 10% of the capital and surplus of the company as determined from financial and other data filed with the Treasury Department. No company may exceed this limitation on any one Federal risk unless it is protected by reinsurance, cosuretyship or other safeguards set forth in the regulations. Many state insurance laws impose similar limitations on non-Federal risks assumed by surety companies.


INDEX

A

Accounting methods ................................. 15 Admiralty ............................................. 67, 96 Agreement ............................... 18, 90, 91, 92 AIA ..................................... 31, 33, 36, 37, 38 Appeal ................................................. 69, 75 Appeal bond ........................................ 69, 75 Association .............. 7, 21, 23, 33, 57, 60, 65 Attachment bonds ..................................... 72 Auctioneers ..................................... 101, 107 Audit .................................................... 17, 19 Average ....................................... 22, 99, 100

B

Bail ...................................................... 70, 71 Bankruptcy .................................... 81, 85, 86 Bid bond ...................... 30, 32, 33, 34, 35, 36 Bonds .. 8, 11, 12, 13, 14, 21, 22, 29, 30, 31,

33, 48, 54, 57, 59, 65, 66, 72, 80, 81, 85, 86, 88, 89, 95, 96, 101, 103, 106, 107, 108, 109, 111, 116

Business .............................................. 18, 20

C

Cancellation .................................. 35, 50, 52 Capacity .............................................. 15, 32 Capital ....................................................... 32 Changes .............................................. 15, 19 Character .................................... 16, 31, 114 Claims ....................................................... 20 Classifications ........................................... 21 Collateral ................................... 76, 101, 117 Commercial ......................................... 23, 57 Completion bond ....................................... 42 Conditions ................................................. 48 Conservators ............................................. 83 Contents .................................................... 23 Continuation .............................................. 71 Continuity .................................................. 15 Contract ... 11, 12, 15, 22, 30, 31, 32, 33, 34,

37, 38, 40, 43, 44, 46, 47 Contractor ......................... 14, 15, 18, 37, 38 Contracts ................................................... 16 Contractual ................................................ 30 Cosuretyship ........................................... 120 Court bonds ................................... 66, 72, 76 Credit ................................................... 15, 19 Criminal ..................................................... 70 Customs bonds ............................. 88, 94, 95

D

Damages ................................................... 58 Dealers .................................................... 105 Deceased .................................................. 82 Decedents ................................................. 81 Decreasing ................................................ 20 Default ....................................................... 20 Defendant ............................................ 67, 69 Discharge ............................................ 68, 97 Dishonesty ................................................ 58 Documents ................................................ 91 DOT ................................................. 117, 118 Duties .................................................. 51, 90

E

Employee dishonesty ................................ 57 Employees ........................ 57, 58, 60, 63, 64 Endorsement ............................................. 58 Equipment ................................................. 23 Equity ............................................ 15, 81, 84 Estate .................................................. 79, 81 Estates ................................................ 82, 83 Excess ....................................................... 59 Exchange ................................................ 110 Execution .................................................. 70 Expenses .................................................. 16

F

Facultative ............................................... 119 Faithful performance of duty ..................... 78 Federal public works ................................. 32 Fidelity bond .............................................. 71 Fiduciary ...................... 67, 78, 79, 80, 81, 86 Fiduciary bonds ................. 67, 78, 79, 80, 81 Financial statements ........................... 15, 16 Fixed ........................................................ 114 Fixed penalty ........................................... 114 Flexibility ................................................. 103 Forfeiture ................................................... 88 Forgery ...................................................... 21 Forms .......................................... 76, 88, 103

G

General contractors .............................. 7, 26 Government ... 6, 39, 54, 88, 89, 90, 92, 113 Guarantee ....................... 12, 30, 48, 99, 102 Guardians .................................................. 83


I

Income ...................................................... 16 Incompetents....................................... 81, 83 Indemnity ..................... 18, 24, 108, 109, 110 Individual ....................................... 60, 84, 88 Individual bonds .................................. 60, 88 Industrial .................................................... 89 Insurance agents bonds ......................... 101 Insurance Services Office ......................... 60 Internal Revenue Code ............................. 89 Internal Revenue Service ......................... 89 Internet ...................................................... 24 Inventory ................................................... 58 ISO ............................................................ 60

J

Joint control ......................................... 79, 87 Judicial bonds ........................................... 65

L

Law ...................................................... 72, 79 Laws .................................... 48, 55, 102, 105 Liability ............................ 23, 49, 59, 64, 111 Libel ........................................................... 97 Licenses .................................................... 48 Life insurance .......................................... 113 Limited ..................................................... 120 Long-term ................................................ 102 Loss ......................................... 20, 43, 58, 84 Lost instrument bonds ............................ 101

M

Maintenance bond .................................... 41 Maritime .................................................. 116 Minimum .................................................... 95 Minors.................................................. 81, 83 Money................................................ 50, 113 Mortgage ................................................. 116 Motor carriers .......................................... 117

O

Obligee 36, 39, 42, 58, 71, 84, 85, 106, 109, 110, 111, 113

Open penalty ................................... 114, 116 Orders ..................................................... 113 Owner ................................ 15, 21, 37, 38, 41

P

Package .................................................... 15 Patent infringement ......................... 101, 116 Patent infringement bonds ...................... 101

Payment bond 12, 26, 27, 32, 33, 34, 39, 40 Penalties ................................................... 94 Performance.. 26, 27, 29, 30, 32, 33, 34, 35,

36, 37, 42, 46, 57 Performance bond27, 30, 32, 33, 34, 35, 36,

42, 46 Plaintiff .......................................... 69, 73, 96 Policies ........................................................ 8 Policy period........................................ 35, 52 Position schedule bonds ........................... 60 Premium .......................... 22, 34, 87, 95, 103 Premiums ............................................ 22, 34 Prequalification ......................................... 14 Primary .................................................... 118 Principal .. 36, 39, 41, 42, 48, 49, 54, 55, 71,

82, 83, 84, 85, 104, 106, 107, 108, 109, 110, 111, 113

Private ............................................... 33, 116 Probate ................................................ 66, 82 Profit .......................................................... 19 Provisions ............................................ 86, 91

R

Rates ............ 21, 46, 50, 60, 78, 89, 90, 116 Receivers ............................................ 83, 86

S

Salvage ................................................... 100 Schedule ............... 16, 60, 62, 63, 64, 85, 86 School teacher bonds ............................. 101 Securities ........................................ 103, 113 Securities and Exchange Commission ... 103 Security ..................................................... 76 Standard ................................ 24, 31, 33, 103 Statutory .................................................... 61 Students .................................................. 116 Subcontractor ............................................ 15 Subrogation ......................................... 8, 103 Suit .......................................... 40, 88, 89, 96 Supply contracts ....................................... 46 Sureties ....................... 10, 15, 16, 31, 43, 53 Suretyship ............................................. 6, 11

T

Term ................................ 49, 88, 89, 95, 103 Termination ............................................... 49 Tobacco .................................................... 89 Trade ......................................................... 93 Transfer ..................................... 91, 108, 110 Transfer agents ....................................... 108 Transit ..................................................... 108


Treasury ...................... 24, 89, 118, 120, 121 Treaty ...................................................... 119 Trustees ........................................ 81, 82, 85

U

Underlying ................................................. 50 Underwriting ........................................ 31, 44 Union bonds ............................................ 116

V

Vendors ............................................. 19, 104

W

We ....................................................... 70, 74 Withdrawals ............................................... 92

SURETY BONDING - Sandi Kruise Insurance …Because of the intricacy of the bonding process, and the...

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Transcript of SURETY BONDING - Sandi Kruise Insurance …Because of the intricacy of the bonding process, and the...