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Surety Glossary

Administrator: A fiduciary appointed by a probate court to manage or distribute the assets of an estate of a person who died without leaving a will.

Advance Payment Bond: Guarantees repayment or liquidation by the principal of moneys advanced in connection with a construction or supply bond or other type of contract

Alcohol Bond (also Liquor Bond): Given in compliance with federal or state laws or regulations administering sale, manufacturer, or warehousing of alcohol; if alcohol is for beverages, the bond is frequently called a liquor bond or intoxicating liquor bond.

Annual Bond: One written to cover contracts or bids awarded or submitted during an annual period or for a period terminating within the fiscal year.

Application: A questionnaire which must be completed, when required, by an applicant for a bond. It gives the surety information about the applicant and contains his/her agreement to indemnify the surety in the event of loss, as well as his/her promise to pay the premium.

Appeal Bond: One filled in court by a party against whom a judgement has been rendered, in order to stay execution of the judgment pending appeal to a higher court, in the hope of reversing the judgment. The bond guarantees that the judgment will be paid if the appeal fails. (Collateral is required in most cases)

Attachment: The act or process of taking, apprehending, or seizing persons or property by means of judicial order, and bringing the same into the custody of the court for the purpose of securing satisfaction of the judgement ultimately to be entered in the action.

Attachment Bond - Plaintiff’s: The statues of the various states contain the ground on which an attachment or replevin can be instituted. The plaintiff must furnish a bond, often in an amount twice the value of the goods being attached. The bond guarantees to pay all damages sustained by the defendant if it is finally determined that the attachment or replevin should not have been issued.

Attachment - Defendant’s Bond to Discharge or Release: When an attachment has been issued, a defendant may discharge the attachment by giving a bond conditioned for the payment of any judgement that may be rendered against him/her in the action, with interest and cost.

Attorney-In-Fact: The holder of a Power of Attorney granted by a surety company empowering the execution of a surety bond on behalf of the company. An Attorney In Fact for an insurance company is sometimes called an “Agent”.

Balance Sheet: A statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period. Assets=Liabilities + Shareholders’ Equity

Bankruptcy: The state of being unable to pay debts as they are or come due as regulated by bankruptcy laws. Straight bankruptcy (Chapter 9) deals with the condition of insolvency in which the court provides for assets to be distributed to creditors. Debtor rehabilitation provisions (under Chapter 11 and 13) of the Bankruptcy Act provide for rehabilitation and reorganization in which creditors look to future earnings of the bankrupt to satisfy claims.

Bankruptcy Trustee Bond: Offers protection to the beneficiaries of a bankruptcy. It assures the beneficiaries that the appointed bankruptcy trustees will perform their duties according to court rulings.

Bid Bond: Given by a bidder for a supply or construction contract to guarantee that the bidder, if awarded the contract within the time stipulated, will enter into the contract and furnish the prescribed performance and payment bonds.

Bid Spread: The difference in the bid price between the first, second and third lowest bidders.

Blanket Position Bond: Bond which protects an employer from loss due to dishonest acts of employees, including embezzlement. The bond is issued for a fixed amount and each position (rather than individual) is covered for this amount.

Bond (Surety): Agreement in which one party, called the surety, obligates itself to a second party, called the obligee, to answer for default of third party, called the principal.

Bond Penalty: See Penal Sum.

Bonding Company (Surety Company): Business authorized to issue bonds. Usually an insurance company.

Broker, Agent: Party representing a client to an insurance company or surety. The Broker/Agent must be licensed. In addition they must have an agreement with each company they deal with. See also Producer.

Cancellation Clause: Provision in a bond permitting a surety to terminate future liability under bond by notification, in writing, to the obligee.

Capacity: The maximum size of a bond allowable by a surety.

Claim: Party(s) demand for something believed due from another party.

Collateral: Anything of value pledged with the surety to secure it against loss by reason of default of the principal. For designated types of collateral, a lower rate is given on certain bonds. (Examples are: Letter of Credit, Cash, Certificate of Deposit)

Commercial Blanket Policy (Blanket Bond): A blanket fidelity policy covering against loss from employees’ dishonest acts. It may exclude owners.

Commercial Bond: Required by businesses (other than contractors) to guarantee completion of service.

Committee: (also conservator, curator, fiduciary) The individual or board of persons the court appoints to manage the estate of a person declared legally incompetent.

Completion Bond: One covering performance of a construction project that names as an obligee a lender or similar party in a position to invoke the performance features of the bond for his/her benefit without an obligation to provide funds to complete. (A difficult bond for a client to obtain)

Consent of Surety: Consent the surety gives the alter or accept changes to their obligation. (i.e. job change orders, release of retainage to final payment.)

Contract Bond: A guarantee of the faithful performance of a construction contract and usually the payment of all labor and material bills related to it.  In those situations where two bonds are required, one to cover performance and the other to cover payment of labor and material, the former is known as a performance bond and the latter as a payment bond. Provides financial security and construction assurance on building/construction jobs. It assures the project owner that the contractor will perform the contracted work and/or pay subcontractors, laborers, and suppliers.

Corporate Surety: A corporation licensed under various insurance laws, which under its charter has legal power to act as surety for others.

Cost Bond: Required of a litigant for payment of court costs incurred during litigation.

Co-Surety: One of two or more surety companies directly participating in a bond. Their obligation to the owners is joint and several but often a limit of liability for each surety is stated as between themselves.

Court Bond (Probate Bond): A general term embracing all bonds and undertakings required of participants in a lawsuit permitting them to pursue certain remedies in the courts. Guarantee proper performance of fiduciary duties (i.e. the execution of a will) and compliance with court orders.

Cumulative Liability: The aggregate amount of two or more bonds in behalf of the same principal (or in the fidelity blanket bonds, in favor of the same obligee) filed in succession, where the succeeding bond(s) does not extinguish the liability under the prior bond(s) or the liability resulting from an adjudicating that the aggregate liability of the surety is the penalty of the bond times the number of years in force.

Customs Bonds: These bonds guarantee the payment of import duties and taxes, and compliance with regulations governing the entry into the United States of merchandise from foreign countries.

Damages: The financial compensation sought by a claimant.

Defendant: Party against whom relief or recovery is sought in an action or suit. Person or entity being accused in a court case.

Defendants Bond: Bonds given by defendants in litigation enabling them to regain possession of property, pending the outcome of a suit, or to suspend the execution of a judgement, order or decree of a court while the defendant seeks reversal of an unfavorable judgement in a higher court. Guarantees payment of damages if a law suit is decided in favor of the plaintiff. These bonds often require collateral.

Depositors Forgery Bond: A bond which provides protection to the insured, and also to banks in which the insured has a checking or savings account, against loss by reason of forgery or alteration of checks, drafts, promissory notes, etc.

Design Build: The design/build system of project delivery is an integration of design and construction, characterized by a single entity providing all the services necessary to design and construct the project based upon the requirements established by the Owner.

Discovery Bond: A form of fidelity bond which covers against dishonest or fraudulent acts of employees provided such loss is discovered any time after the bond becomes effective and before it is terminated, irrespective of when the dishonest of fraudulent acts were committed.

Dishonesty Insurance: Used interchangeably with the Fidelity Bond or Fidelity Policy.

Employee Retirement Income Security Act (1974) --- ERISA: This act, which replaced the Welfare and Pension Plans Disclosure Act of 1962, requires employee benefit plans, subject to the Act, to be bonded by accepted surety companies (as indicated by the U.S. Treasury Department’s List), for the protection of plan funds. ERISA also requires the disclosure and reporting of financial and other information concerning the operation of employee benefit plans. Protects the retirement assets of Americans. The law established legal guidelines for the administration of private pension plans and investment practices. The law ensures that fiduciaries do not misuse funds.

ERISA Bond/Policy:  A bond required by ERISA for all employee benefits plans covered by ERISA. The bond/policy is a Fidelity Policy and protects the moneys of the Plan from theft. The Employee Benefit Plan is the named insured. ERISA requires that the bond be a minimum of 10% of the assets of the Plan with the maximum of $500,000.

Errors and Omissions Insurance (E&O): An insurance policy covering damages from mistakes. These mistakes may be unintentional, due to negligence, or due to a failure to take appropriate action.

Endorsement (see also rider): Amendment added to a written document, particularly an agreement between parties, altering its provisions.

Equity: Pecuniary value of property exceeding claims and liens against it.

Excess Bond or Policy: Additional coverage over a primary bond or policy protecting against loss (usually do to dishonesty) applying only to loss above a specified amount.

Exclusion: A provision in a bond referring to perils or property not covered.

Executor: A fiduciary named in a will to manage or distribute the assets of an estate and pay all claims and debts. (See also “Administrator”)

Fidelity Bond or Fidelity Policy: A bond which will indemnify an insured for loss caused by a dishonest or fraudulent act of an employee covered under the bond. Also known as dishonest insurance. Often these bonds are issued when an employer hires 'high risk' employees.

Fiduciary:  A person who occupies a position of trust, particularly one who manages the affairs of funds of another.

Fiduciary Bond: Required of administrators, executors, guardians, committees, etc., guaranteeing faithful performance of duty in accordance with the laws applicable to the trust. Frequently called a probate bond because the bond is customarily filed in a probate court.

Financial Guarantee Bond: A bond which guarantees payment of a sum of money whether or not the exact amount is known or stated. Common types are court bonds (appeals, etc.), lease bonds which guarantee payment of rent, utility bonds, sales tax bonds, etc.

Financial Statement: A financial report, including a balance sheet, an income statement and notes which the surety requires of an applicant for a bond (particularly a contractor), setting forth his/her financial position as of a given time or period.

Forfeiture Bond: A bond where the full penalty is payable upon breach of condition regardless of the amount of loss or damage.

Funds control: A means to ensure proper disbursement of funds to sub-contractors and suppliers of a construction/building job.

GAAP: Generally Accepted Accounting Principles.

General Indemnity Agreement (GIA): An indemnity agreement is a contract entered into between indemnitor and surety in which indemnitor secures surety against loss surety may sustain on bond on behalf of itself or another.

Guarantor: Party undertaking that another party will pay or will perform; one who becomes secondarily liable for another’s debt or performance; e.g., a surety is a guarantor.

Guardian: Court-appointed fiduciary caring for a minor or incompetent person and administering an estate on his or her behalf.

Immigrants Bonds: A class of Federal bonds covering aliens who legally enter the United States for temporary reasons, such as study or work, or for permanent reasons. i.e., to become United States citizens. Such obligations are conditioned upon departure from the country as called for by entry permits and are required to ensure the aliens do not become public charges.

Indemnify: To compensate for actual direct loss sustained under a bond. There can be no recovery on a bond until the obligee has actually suffered a loss.

Indemnitor: One who enters into an agreement with a surety company to hold the surety harmless from any loss or expense it may sustain or incur on a bond issued on behalf of another.

Indemnity: Security against and compensation for hurt, loss or damage. Also, the promise by a Principal to save the surety harmless from a loss as a result of the surety assuming an obligation of the Principal.

Indemnity Agreement: Contract entered into between indemnitor and surety in which indemnitor secures surety against loss surety may sustain on bond on behalf of itself or another.

Indemnity Bond: A general term describing any bond which protects the obligee against direct loss which may arise as a result of failure on the part of a principal to perform.

Injunction: Judicial process requiring a person to do, or to refrain from doing, a particular thing.

Joint Control: An arrangement by written agreement between a fiduciary and a surety, acknowledged by the bank in which funds are deposited of securities lodged so that the funds or securities are controlled by both parties; usually all checks are required to be signed by the fiduciary and signed by an authorized representative of the surety and access to the securities can be had only in the presence of an authorized representative.

Judicial Bonds: A general term applied to all bonds filed in court – whether Fiduciary or court bonds.

Labor and Material Bond: A bond given by a contractor to guarantee payment for the labor and material used in the work which he is obligated to perform under the contract. This liability may be contained in the performance bond, in which case a separate labor and material bond (payment bond) is not given.

Lease Bond: Guarantees that the party leasing property will make payments and fulfill other terms of the lease.

License Bond (also Permit Bond): Used interchangeably with the term “permit bond” to describe bonds required by state law, municipal ordinance or regulation, to be filed prior to the granting of a license to engage in a particular business or permit to exercise a particular privilege. Such bonds provide payment to the obligee for loss or damage resulting from violations by the licensee of the duties and obligations imposed upon him/her.

Lien Bond, Release of: Secures owner of realty against loss from liens against his property; e.g., unpaid bills for work on owner(s) property.

Limit of Liability: The maximum amount which an insurance or surety company is obligated to pay in case of loss (also bond penalty or penal sum).

Liquid: Assets capable of being readily converted into cash.

Lost Instrument Bond also known as a Lost Trust Deed Note Bond: A bond given by the owner of a valuable security (stock, bond, promissory note, certified check, etc.) which is alleged to have been lost or destroyed. It protects the issuer of the security against loss which may result from the reissuance of a duplicate or, in some instances, payment of cash value thereof.

Maintenance Bond: The normal coverage provided by a maintenance bond is a guarantee against defective workmanship or materials. However, maintenance bonds sometimes incorporate an obligation guaranteeing “efficient or successful operation” or other obligations of like intent and purpose.

Miller Act: The Miller Act was enacted by Congress in 1935. This law replaced the Heard Act of 1894 which required contractors to obtain surety bonds on public works. The Miller Act requires federal government to require performance and payment bonds on its construction projects and extends the payment bond’s protection to certain subcontractors and suppliers. Most public bodies such as states, cities, and municipalities follow a bonding requirement similar to the Miller Act (called “the little Miller Act”).

Miscellaneous Bonds: Bonds which do not fit any of the well-recognized categories. Bonds in which the obligation is a promise to pay contingent on some event occurring. Examples include Turnpike Toll Bond or a Milk Dealer Bond.

Name Schedule Bond: A fidelity bond which covers the employees listed by name in a schedule, each for a specified amount.

NASBP –National Association of Surety Bond Producers: The National Association of Surety Bond Producers is an organization of insurance agencies and brokerage firms that are recognized as specialists in providing surety bonding and insurance for construction contractors and other businesses. The individuals within these firms who work with businesses on their insurance and surety bonding needs are called agents, brokers, and producers.

Obligee: The party in whose favor a bond runs; the party protected by the bond against loss. An obligee may be a person, firm, corporation, government or an agency of a government. An example would be a project owner on a construction site.

Open Penalty Bond: A surety bond written without a limit on the liability of the principal or surety. Under the regulations of the federal government and the laws of many of the states, surety companies are not permitted to obligate themselves on any one bond for an amount greater than a specified percentage of their of their capital and surplus (qualifying power). Consequently, many open penalty bonds read to the effect that “the surety hereunder obligates itself in an amount equal to the maximum amount of which it may legally bind itself.”

Ordinance: Regulation of a governmental body.

Payment Bond: A bond given to guarantee payment, usually of a contractor to sub-contractors and suppliers. This is frequently the only protection offered those supplying work or materials to a public job.

Penal Sum: (also bond penalty) the maximum amount for which a surety company may normally be held liable under the bond. Also called the bond penalty. See also limit of liability.

Performance Bond: A financial guarantee that the contract will be performed, but it is not an explicit undertaking by the surety to perform the contract. The performance bond is a joint and several promise by the surety and the bond principal to the obligee that the principal will fully and faithfully perform all of its obligations in the terms of a written contract for furnishing supplies or for construction of all kinds. Performance bonds frequently incorporate payment bond (labor and materials) and maintenance bond liability.

Permit Bond (also License Bond): Used interchangeably with the term “License Bond” to describe bonds required by state law, municipal ordinance or regulation, to be filed prior to the granting of a license to engage in a particular business or permit to exercise a particular privilege. Such bonds provide payment to the obligee for loss or damage resulting from violations by the licensee of duties and obligations imposed upon him.

Plaintiff: The party who files a complaint or sues to seek remedial relief for an injury.

Plaintiff Bond: Bonds given by plaintiffs in litigation enabling them to exercise certain privileges with permission of the court, such as Attachment, Injunction, Replevin.

Position Schedule Bond: A fidelity bond which covers employees who may, while the bond is in force, occupy and perform the duties of the positions scheduled in the bond, each position being covered for a specific amount.

Power of Attorney: Instrument authorizing one person or corporation to act for and obligate another, to the extent expressed in the instrument creating the power. In corporate suretyship, an instrument under seal which appoints an individual as an attorney-in-fact to act on behalf of a surety in executing bonds.

Prequalification Letter: Letter provided by Agent or Surety outlining the surety credit their customer has prequalified for.

Premium: the fee to be paid for the bond. The cost of the bond.

Principal: The one who is primarily bound on or furnished by a surety company. For example, in a contract bond, the principal is the contractor; for a public official bond, the principal is the public official; for a fiduciary bond, the principal is the administrator, executor or guardian. For a license bond, the principal is the one to whom the license is issued.

Probate: Court procedure by which a will is proved to be valid or invalid or if no will exists, appoint an administrator/administratrix to manage and dispute the estate.

Producer: Party who, for a fee or commission, arranges for the placement of bonds or insurance with a writing company on behalf of a customer; a producer may be an agent duly appointed by a writing company to represent it or a broker who represents the customer.

Pro Rata Cancellation: Cancellation of a bond when the portion of the premium returned is the full proportionate part due for the unexpired period Distinguished from short rate cancellation. Because surety companies have a minimum premium that they will refund, there may not be a return premium on pro rata cancellation. Typically the first year’s premium on bonds is fully earned.

Public Official Bond: A bond that guarantees faithful performance of duty official in a position of trust; also provides for an honest accounting of all public funds handled by official. Such bond is given to comply with a statue and, therefore, carries whatever liability the statute imposes.

Rate: The cost of a unit of bond coverage. Such unit is usually in the denomination of $1,000. (Given as Dollar per Thousand or as a % [i.e., $10 = 1%].)

Receiver: Person appointed to represent the court in holding in trust and in administering property under litigation.

Reclamation Bond: A bond which insures that an entity will restore to its original condition, land that it has mined or altered.

Recovery: Reimbursement received by a surety from a reinsurer, or by subrogation, or from salvage following loss.

Reinsurance: The cession by a surety company(the reinsured) of a stated proportion or amount of risk and the assumption of such cession by another carrier or carries (the reinsurer) in consideration of a premium paid by the reinsured to the reinsurer. The proportion of the risk not ceded is referred to as the retention or net line. Reinsurance is effected under a contract called reinsurance agreement or treaty.

Release of Lien: removal of a lien if owner of the property settles hi/her debates or a transfer of a lien from the property to a bond through the filing of a release of lien bond.

Replevin: Replevin is an action to recover possession of specific articles or personal property. The replevin bond, which the plaintiff is required to furnish, conditioned for the return of the property, if return is ordered, and for the payment of all costs and damages adjudged to the defendant.

Rider: A form changing or adding special provisions to a bond. Sometimes called an endorsement.

Retrospective Plan Bond: An insurance program bond which has a final premium payment based on incurred losses and an administrative charge.

SBA: An acronym representing the Small Business Administration. The SBA has programs to help minority owned and small businesses obtain surety bonds. They can be found on the web at www.sba.gov.

Self-Insurers Retention Plan Bond: Used for Workers' Compensation, general liability and other coverage where only limited or unaffordable coverage is available.

Statutory Bond: A term generally used describing a bond given in compliance with a statue. Such a bond must carry whatever liability the statue imposed on the principal and the surety.

Stay of Execution: A bond to stay or suspend execution on a judgement. It guarantees the payment of the judgement upon termination of the stay.

Stop Order (also stop notice): Formal written notification from owner to contractor to cease work on a project.

Subcontractor Bond: One required by a general contractor, guaranteeing that the subcontractor will faithfully perform the subcontract in accordance with its terms and conditions and will pay for labor and material incurred in the prosecution of the subcontracted work.

Subdivision Bond: Many municipalities provide by ordinance that a developer who undertakes to lay out a housing or industrial subdivision shall give bond with surety to guarantee that, within a specified time, improvements on the property, such as streets, sidewalks, curbs, gutters, and sewers will be constructed. There is considerable variation in circumstance under which such bond may be required, but the feature which is common to all is that the improvements are to be made at the expense of the developer; the principal on the bond.

Subrogation: The legal or equitable process by which a surety company obtains from a third party recovery of an amount paid out by the surety to the obligee or a claimant under the bond.

Superseded Suretyship: When a company writes a bond to take to place another bond which is canceled on the effective date of the new bond, a rider is generally attached (unless the bond itself contains a superseded suretyship provision) agreeing to pay losses that would have been recoverable under the first bond except for the expiration of the discovery period.

Supply Bond: A bond which guarantees faithful performance of a contract to furnish supplies or materials. In the event of a default by the supplier, the surety must indemnify the purchaser of the supplies against the loss.

Surety: A person or corporation bound or obligated for the payment of money or the performance of an act or duty to another.

Surety Bond: An agreement providing for monetary compensation should there be a failure to perform specified acts within a stated period. A Bond that is a three party agreement between a contractor (Principal), the project owner (Obligee), and the surety company. The bond insures that the contracted work will be completed on time and on budget and will cover any losses incurred by poor contract performance.

Surety Industry: Contract and commercial surety businesses that provide bond coverage through agents and brokers.

Suretyship: Refers to obligations to pay the debts of, or answer for, the default of another. It assumes a legal relationship based upon a contract in which one person (the surety) undertakes to answer to another (the obligee) for the debt, default or miscarriage of the third person (the principal), resulting from the third person’s failure to pay or perform as required by an underlying contract or agreement.

Third Party Bond:  A license bond which gives parties other than the named obligee a right of action (claim) in their own name to recover loss or damage resulting from a breach by the licensee of his obligations under the law, ordinance or regulations under which the bond is required.

Treasury Limits (Listing):  These are qualifying limits imposed upon surety companies by the United States Treasury Department.  To be an acceptable surety on bonds in favor of the United States, the surety must qualify financially under regulations of the Treasury Department.  That department annually issues a list of companies so qualified, the underwriting limit of each, the states in which each is licensed, and other data.  The underwriting limit is frequently referred to as the qualifying power, which is equal to 10% of the capital and surplus of the surety.

Trustee: One named in a will or deed of trust to manage property for the benefit of another.

Underwriter: Any individual officer or employee of an insurance company who has the responsibility of accepting risks and determining the amounts acceptable.

WIP:  Work in process.

Work-On-Hand Report: Report listing a contractors jobs in progress.

Workers' Compensation Self-Insurers Bond: A bond guaranteeing that an employer will compensate an employee injured on the job, as mandated by law. An employer may choose to post a workers' compensation bond instead of purchasing workers' compensation insurance. This is a dangerous venture due to 'long-tail' exposure. 'Long-tail' liability is one where an on the job injury takes time to become known and claim to be filed, i.e. asbestos exposure. In this regard there are two statutory bond forms: 1). Last surety on-bond form - The surety is responsible for ALL workers' compensation claims. The surety is released from liability if the bond is canceled or replaced. 2). Traditional-Bond Form - The surety is liable for payment of any workers' compensation claims that occur during the time the bond is in force, even after the policy has been cancelled.