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Frequently Asked Questions

What is a surety bond?

A surety bond is contract among three parties.  The Obligee is considered the “beneficiary” to the bond, the Principal is the individual or entity required to perform a particular contract or obligation and the Surety is an individual or entity who undertakes an obligation to pay a sum of money or to perform a duty or promise on behalf of another individual or entity in the event that person fails to act or defaults on their duty or contractual obligations.  There are thousands of surety bond requirements nationwide however, they are generally classified as contact bonds, subdivision bonds, license bonds, permit bonds, miscellaneous bonds and court bonds.

 

How do I obtain a surety bond?

Bonds are issued through surety agents/broker also known as “producers.”  These agents are typically appointed with several surety bond carriers.  This is important as most surety bond specializing agents have knowledge of bond requirements and can align specific requests or bond programs with the most suitable market.

 

Why are surety bonds required?

Surety bonds are required for various reasons.  The Miller Act of 1932 mandates bonding on all Federal construction projects above a certain monetary value.  Most States have adopted “Little Miller Act” statutes on projects funded by City, County, State or other municipalities.  With regard to public works contracts, performance and payment bonds serve as protection against contractor default.  They ensure the project will be completed according to the contract terms and conditions as well as guarantee payment to all subcontractors and suppliers on the job.  Other license and permit bonds are mandated to protect against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond ensures that the Principal will comply with all regulations and licensing requirements.   Court and miscellaneous bonds are required to ensure the ethical performance of a fiduciary responsibility.  Should the Principal be found to have caused a loss through fraud or malfeasance, the bond would reimburse those affected.  Surety bonds are required in certain judicial matters from a party to a lawsuit to paylosses which may arise from the delay or depravation caused by the legal proceeding should they not prevail in the matter.

 

What is the cost of a surety bond?

Premiums charged for surety bonds vary based on a number of factors.  They are assessed in conjunction with the Carrier’s rate filings on a State by State basis, as well as in consideration of the type of bond, bond amount, personal credit and/or the financial strength of an applicant.  Generally, the cost of a surety bond is a percentage of the penal sum of the bond.  Often bond premiums are calculated as a dollar amount per thousand.

 

What is the difference between a surety bond and insurance?

The main difference between a surety bond and insurance is that a surety bond does not provide protection for the party purchasing the bond.  A surety bond transfer’s risk to a third party where insurance is a two party risk transfer mechanism.  Unlike insurance, bonds are underwritten with no expectation for a loss.  Should a loss be incurred by a bonding company, repayment by the Principal is expected.

 

What is indemnity?

Indemnification is protection, security and/or a promise to pay the cost of damage, loss or injury.  With regard to obtaining surety bonds, an indemnity agreement, also referred to as a general indemnity agreement or GIA, is a formal document/contract between a principal to a bond (insured) and the bonding company or carrier.  The indemnity agreement obligates the named indemnitors to protect the surety company from any loss or expense the surety sustains as a result of having issued bonds on behalf of the bond principal.  If the principal fails to fulfill its bonded obligation and the surety suffers a loss, the indemnitors are legally bound to indemnify/repay the surety for its losses.

 

Why does my spouse have to sign the indemnity agreement if she has no ownership or involvement in the company?

In most cases, bonding companies require spousal indemnity based on personal assets being shared between spouses.  Should a loss be incurred by a bonding company, they will act to perfect their indemnity position for reimbursement.  Based on community property, spousal indemnity ensures assets are not transferred to a spouse as a means of avoiding repayment of a loss to the bonding company.

 

How do I qualify for a surety bond?

The underwriting process for a surety bond varies based on the type of bond needed and the bond amount.  Some bonds simply require the collection of basic information needed to execute the bond.  Other surety bonds require a credit check of the individual or owner of the business and other bonds or bond programs may require the need for financial disclosure.  Relative to a contractor obtaining bid, performance and payment bonds, most bonding companies offer a limited program which qualifies them for bonds solely based on the business owner’s personal credit.  Larger single job and aggregate bonding capabilities require more in depth information from the contractor.  Generally, a questionnaire which provides an overview of the contractor’s business operations, references, banking and other information useful to underwriting would be required in addition to financial statements for the company and owners, a schedule of work-in-progress and bank line of credit details.

 

How is my bond premium being calculated?

Premiums charged for surety bonds vary based on a number of factors.  Often, bond premiums are calculated as a dollar amount per thousand.  They are assessed based on the Carrier’s rate filings on a State by State basis, as well as in consideration of the type of bond, bond amount, personal credit and/or the financial strength of the applicant.  Generally, the cost of a surety bond is equivalent to a percentage of the penal sum of the bond.  In many cases, the bond premium is not assessed on a flat percentage.  Some premium rates are tiered where the premium percentage decreases as the bond amount increases.

 

Will I be declined to purchase a bond based on my credit?

The personal credit of a bond applicant may be considered during the underwriting process depending on the type of bond and bond amount.  Personal credit is often considered an important part of the underwriting process.  As a result, a bond may be declined for those applicants who do not meet the bonding company’s minimum credit score model.  Items such as a prior bankruptcy, liens and/or judgments are highly unfavorable to the underwriting process.

 

How long will it take to become bonded?

The approval process will vary based on the type of bond required, the bond amount or the size of bond program needed.  Most license, permit, miscellaneous and court bonds can be underwriting in 24 to 48 hours.  Larger bonds or programs take longer to underwrite and can only be determined on a case by case basis.

 

What is fund control?

With regard to construction projects, funds control, also known as funds disbursement or funds administration, is utilized as a means of overseeing a contractor’s proceeds on a job.  The fund control company acts as an independent third party to the contractor and surety . Under certain circumstances, bonding companies may require funds control to enhance a contractor’s bond program if they are exceeding their qualified single or aggregate parameters.  Generally, the funds control company will establish an escrow account and requires a letter of directive from the project owner to forward all progress payments from the job to the fund control company for deposit into the escrow account.  The fund control company assists the contractor with obtaining the proper paperwork required by the project owner as well as from all subcontractors and suppliers on the project, inclusive of lien releases.  Once the required paperwork has been collected, the fund control company will disburse payments to all subcontractors and suppliers and forward the balance to the contractor, aside from any required hold back. Funds control is considered a risk mitigating tool in the surety underwriting process.

 

What is collateral?

By definition, collateral is a property or other asset pledged as security for repayment of a loan, to be forfeited in the event of default or a loss.  With regard to surety bonds, collateral may be required in order to qualify for a particular bond or bond program.  The most common forms of collateral taken in the surety industry are cash, irrevocable letters of credit and real estate equity.  Collateral is sometimes taken by a bonding company when an applicant does not meet their underwriting guidelines for a particular bond or bonding program.

 

What do I do once I have the bond?

Commonly, the original, wet-signature, surety bond must be filed with the entity requiring the bond (the Obligee).  In some cases, the original bond is retained by the entity required to post the bond (the Principal).

 

How do I determine if the bonding company is reputable?

Knowing if a bonding company is Treasury Listed is useful.  The T-list reflects all surety companies approved to write bonds to federal entities.  Note, some City, County, State or other municipalities will accept surety bonds from a company who is not T-listed.  You can access the Treasury List as follows:  https://www.fiscal.treasury.gov/fsreports/ref/suretyBnd/c570.htm.  Another useful reference is a bonding company’s A.M. Best Rating.  An A.M. Best financial strength rating is an independent opinion of an insurance carrier’s financial strength, as well as their ability to meet its open insurance policies and contract obligations.  A.M. Best Ratings are independent opinions, based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile, in addition to the credit quality of its obligations.  Many local, City, State and Government municipalities set minimum A.M. Best rating for acceptance of bonds from an insurer.  A link to the A.M. Best search website is http://www3.ambest.com/ratings/entities/search.aspx.

 

What is an SBA Surety Bond Program/Guarantee?

The U.S. Small Business Administration has a program to assist disadvantaged contractors obtain bid, performance and payment bonds where they have not qualified in the standard bond marketplace.  The SBA does not issue surety bonds, they share the risk or liability with a bonding company.  In most cases, the SBA assumes 80% of the bond liability.  In other cases, they may guarantee 90% however, they are generally related to contractors who have obtained a Disabled Veteran Business Enterprise (DVBE) designation.  For additional details please visit https://www.sba.gov/surety-bonds.

 

Surety Associations

8(a)

A designation approved and granted by the U.S. Small Business Administration (SBA), given to a firm or entity deemed to be socially or economically disadvantaged.  An 8(a) designation provides eligibility to receive financial assistance, training, mentoring and other beneficial forms of assistance.  A company must be supplied an 8(a) status to participate in the SBA Mentor-Protégé Program.  The SBA Mentor-Protégé Program is designed to allow larger, more successful firms to partner with these 8(a) firms and provide various types of business development assistance.  The goal of the SBA Mentor-Protégé Program is to develop 8(a) participants to be more competitive, achieve entrepreneurial success and to contribute to the strength of our economy.  Relative to surety, a contractor who is qualified under the 8(a) program may have an opportunity to expand their bonding capabilities by teaming with a larger contractor on construction projects which require performance and payment bonds.  The federal government sets aside a portion of their allotted budget for construction to award projects under the Mentor-Protégé Program.  In addition, some local, City, County, State and Federal municipalities will grant discounts on bid prices for contractors who possess an 8(a) designation.

 

A
Accrual Basis Accounting
A financial reporting method which recognizes revenues and expenses as they are incurred.  This accounting method records revenue and expenses irrespective of the date in which any cash flows occur.  As a result, accrual accounting recognizes receivables and payables. Cash accounting only recognizes revenues and expenses when cash flows occur. With regard to surety bond underwriting, accrual accounting is more desirable than the cash method.  Moreover, larger single job and aggregate bond programs often require percentage of completion reporting, which is a more regarded accounting method to most surety underwriters.

 

Administrator Bond
An administrator is a person or entity legally appointed to manage and dispose of the estate of an individual, a deceased person, a debtor or an insolvent company. Probate courts often require an administrator bond as a guarantee they will ethically perform their fiduciary responsibilities.  Should the administrator be found to have caused a loss through fraud or malfeasance, the bond would reimburse those affected.

 

Agent
A person or entity authorized to act on behalf and/or represent a person or organization.  With regard to surety bonds, it is generally required that an agent or broker be utilized as an intermediary between the person or entity requiring the bond/bonding and the insurance carrier/bonding company.

A.M. Best Rating
An A.M. Best financial strength rating is an independent opinion of an insurance carrier’s financial strength, as well as their ability to meet its open insurance policies and contract obligations.  A.M. Best Ratings are independent opinions, based on a comprehensive quantitative and qualitative evaluation of a company’s balance sheet strength, operating performance and business profile, in addition to the credit quality of its obligations.  Many local, city, state and government municipalities set minimum A.M. Best rating for acceptance of bonds from an insurer.

 

Appeal Bond
A surety bond, also known as a supersedeas bond, that a court requires from an appellant who wants to delay payment of a judgment until the appeal process is concluded.  An appeal bond guarantees payment of the judgment along with interest or other costs incurred which arise from the appeal process.  Appeal bonds are stringently underwritten and their approval often requires collateral in the full penal sum of the bond.  See defendant bond for further details.

 

Application
A form used to collect information regarding an applicant which is pertinent to underwrite a particular surety bond requirement.

 

Appraisal Management Bond
An appraisal management company (AMC) is defined as an independent entity through which mortgage lenders order residential real estate valuation services for properties on which they are considering extending loans.  Most States have implemented either regulations and/or licensing procedures for Appraisal Management Companies.  Upwards of 18 States require an Appraisal Management Company surety bond in conjunction with a license certification.

Attachment Bond
An attachment is the legal process of seizing an asset from another individual or entity to ensure satisfaction of an expected judgment against them.  The document by which a court orders such a seizure is known as a writ of attachment.  Attachments are sought when a favorable ruling is anticipated on behalf a plaintiff who claims to own the property and/or be owed money by the defendant.  An attachment bond, also known as a writ of attachment, undertaking bond or replevin bond are required by a party to a lawsuit to guarantee payment of losses which may arise from the delay or depravation caused by the legal proceeding should they not prevail in the matter.

 

Attorney-in-fact
A person authorized to perform business-related transactions on behalf of another person or company.  Generally, surety bond agents or brokers are authorized as attorney-in-fact through a bonding company’s issuance of a power of attorney.  This power of attorney allows the agent/broker to execute approved surety bonds on behalf of the insurer.

 

Auction/Auctioneer Bond
An auction company or auctioneer is a person or company engaged in managing an auction, or a public sale at which people can bid on items.  Most auctioneers act as a 3rd party to a monetary transaction.  Auction company or auctioneer bonds are required in 41 states in order to obtain a license.  The bond is mandated to protect the State and general public against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the auctioneer complies with all State regulations and licensing requirements.

 

B
Backlog
A monetary estimate of a contractor’s uncompleted projects in progress at a specific date.  Backlog is a term often utilized in construction bonding.  It is a key underwriting consideration when determining a contractors open single job and/or aggregate bonding capabilities.

 

Balance Sheet
A report that summarizes the assets, liabilities and equity of a company at a given point in time.  Balance sheets are one of the three main components of a financial statement and are typically accompanied by an income statement/profit and loss as well as a statement of cash flows.  A company’s balance sheet is a key underwriting item when qualifying for certain surety bonds.

Bankruptcy Trustee Bonds
A fiduciary bond guaranteeing faithful performance of an appointed trustee in a bankruptcy action.  The bond provides protection to the beneficiaries of the bankruptcy action that the bonded trustees will perform their fiduciary responsibilities and handle the affairs according to the rulings of the court.

Bid Bonds
A bid bond is required of a contractor by a project owner as a guarantee that the bidder will enter into the contract if awarded the job.  In addition, the bid bond stipulates that the contractor will procure performance and payment bonds in support of the contract to ensure its satisfactory completion.  A bid bond or other bid security is required on most public work projects.  The Miller Act of 1932 mandates bonding on all Federal construction projects above a certain monetary value.  Most States have adopted “Little Miller Act” statutes on projects funded by city, county, state or other municipalities. In addition, a growing number of general contractors and construction managers require bid bonds from subcontractors to ensure they are qualified to bid a particular job.

 

Bid Results
A list of all bids received on a project with regard to each contractor’s bid price.  Generally, the lowest qualified bidder is awarded the job.  Bid results are underwritten based on the engineer’s estimate for the project, as well as the difference between a contractor’s bid price and the next lowest bidder.  Bid spreads of greater than 10% are typically underwritten more stringently.

 

Bond Amount
Also termed penalty or penal sum with regard to surety bonds, is a specified amount of money which is the maximum value that the surety company is obligated to pay in the event of a principal’s default resulting from a bond claim.

 

Bond Form
A bond form is the document and/or language required for a particular surety bond.  Most Federal, State, County and local municipalities have mandated forms on which they require bonds to be executed.  Generally, a valid surety bond will consist of an executed bond form, notary acknowledgment and power of attorney issued by the bonding company.

 

Bond Program
See bonding capacity.

 

Bonding Capacity
Also referred to as bond program, bonding capacity is a term most widely used in construction bonding which highlights the maximum total contract value a surety company will extend to a contractor on a single job basis as well as the aggregate sum of all contracts ongoing at any given time.  Similarly, bonding capacity may be relative to other principals operating outside the construction industry and would represent the maximum underwriting approval value on a per bond basis, as well as the sum total of all bonds outstanding at any given time.

 

Broker
A person acting as representative of one or more insurance companies to sell, solicit or negotiate insurance transactions for compensation.  With regard to surety bonds, it is generally required that an agent or broker be utilized as an intermediary between the person or entity requiring the bond and/or the insurance carrier/bonding company.

 

C
Cash Basis Accounting
A financial reporting method where revenues are recognized when payment is received and expenses are recorded when they are paid.  Cash basis financial reporting is not highly regarded in the surety underwriting process.

 

Certificate of Title Bond
Also known as a defective title bond or bonded title, is a document that proves a person’s ownership of a motor vehicle or vessel.  The bond allows the vehicle owner to obtain a new certificate of title should the original have become lost as well as sell, insure or register the vehicle.  The certificate of title bond covers monetary damages should the bond not be issued to a proper vehicle owner.

 

Certified Public Accountants
A designation given to accounting professionals by the American Institute of Certified Public Accountants.  It is a certification that an accountant has fulfilled all requirements set forth by State law as well as passed any required examination and/or work history requirements.  The financial statements generated by Certified Public Accountants are an important tool utilized by bonding companies during the underwriting process.

 

Check Casher Bond
A check casher is defined as a person or business who cashes checks with a face value of $1,000 or greater.  12 states require a check casher bond in order for the person or entity to be issued or maintain a check casher license.  The bond is mandated to protect the State and general public against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the check casher complies with all State regulations and licensing requirements.

Collateral
By definition, collateral is a property or other asset pledged as security for repayment of a loan, to be forfeited in the event of default or a loss.  With regard to surety bonds, collateral may be required in order to qualify for a particular bond or bond program.  The most common forms of collateral taken in the surety industry are cash, irrevocable letters of credit and real estate equity.

 

Collection Agency Bond
A collection agency is also known as a debt collector.  It is an individual or entity that pursues the collection/payment of debts owed by individuals or businesses for a fee or a percentage of the total amount owed.  32 states mandate collection agency bonds prior to the issuance of a collection agency or a debt collector license.  Because collection agencies act as a third party to a monetary transaction, the bond is mandated to protect the general public against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the collection agency complies with all State regulations and licensing requirements.

Commercial Bonds
A general classification of surety bonds that are not considered contract performance, payment or subdivision bonds.  There are thousands of commercial bonds which fulfill various license, permit and miscellaneous requirements nationwide.  These bonds are generally mandated by various federal, state, city and local municipalities.  In order for an individual or business to perform a particular activity, occupation or obtain a professional designation, they may be required to post a bond for issuance of a license or permit.  Common commercial bonds are Appraisal Management Bonds, Auction/Auctioneer Bonds, Auto Dealer Bonds, Collection Agency Bonds, Car Wash Facility Bonds, Certificate of Title Bonds, Commercial Fundraiser Bonds, Contractor’s License Bonds, Check Casher Bonds, Credit Services Bonds, DMV Bonds, ERISA/Pension Bonds, Escrow Licensee Bonds, Fidelity Bonds, Finance Lenders, Financial Guarantee Bonds, Insurance Broker Bonds, Lost Instrument Bonds, Medicare/DMEPOS Bonds, Money Transmitter Bonds, Mortgage Broker Bonds, Notary Public Bonds, Process Server Bonds, Public  Adjuster Bonds, Public Official Bonds, Sales Tax Bonds, Sport Permit Bonds, Surplus Lines Broker Bonds, Tax Preparer Bonds, Telemarketing Bonds, Title Agency Bonds, Used Auto Dealer Bonds, Wage and Welfare Bonds.

 

Completed Contract Accounting
A financial reporting method which postpones the reporting of income and expenses incurred on a project until the contract is completed.  The completed contract accounting method is sometimes used in the construction industry for company’s who contracts span long periods of time.  Nonetheless, the percentage of completion accounting method is generally more desirable to the surety bond underwriting process for contractors.

 

Completed Contracts Schedule
A report which highlights details for each contract completed by a contractor as well as the profitability of the job during the period of reporting.

 

Conservator Bond
A conservator is a person, official, or entity appointed by a court to provide care and manage the finances for an incompetent adult or minor.  A probate conservator bond is often required as a guarantee they will ethically perform their fiduciary responsibilities.  Should the conservator be found to have caused a loss through fraud, malfeasance, or mistreatment, the bond would reimburse those affected.

 

Contract Bonds
A classification of surety bonds which guarantee the fulfillment and completion of a contract according to all terms and condition set forth in the contract. Examples of contract bonds are performance bonds, payment bonds, subdivision bonds and completion bonds.  Contract performance and payment bonds are most commonly required on construction related projects.  A performance bond is a legally binding instrument whereby a Bonding Company, (the Surety), guarantees to a project owner, (the Obligee), that a contractor will meet all terms and conditions set forth in a contract.  In addition, it mandates completion of the project within the time allowed and at the agreed price.  A performance bond is often required by the project owner, as a means of protecting the project owner from financial loss, should a contractor default and fail to complete the job.  Performance bonds are also termed as contract bonds, completion bonds, supply bonds and in some cases maintenance or warranty bonds.  Performance bonds are typically accompanied by a payment bond.  Payment bonds are also legally binding instruments whereby the Surety Company, guarantees to a project owner, that a contractor will pay all monies due to subcontractors, laborers, and material suppliers on a project.  Payment bonds are also termed as labor and material bonds.

 

Contractor
A person or company that provides materials or labor to perform services or to complete a project.  Relative to surety bonds, contractors are the largest professional designation that are required to provide bonds.  Contractor’s License Bonds are required in most States in order for a contractor to be issued or maintain a license. In addition, many commercial and public works projects mandate a contractor’s need for bid, performance and payment bonds.

 

Contractor’s License Bond
A surety bond requirement for a contractor to become licensed.  35 states currently require contractor’s license bonds prior to the issuance and/or the maintenance of a license.  Some States only require a bond if the amount of work performed in the state exceeds a certain value.  Contractor’s license bonds provide protection if the contractor fails to complete a job or fails to meet other financial obligations such as paying subcontractors and suppliers.

 

Cost to Complete
An estimate of the remaining money or cost to finish a project as of a certain date and up to completion.  Cost to complete is utilized during the surety underwriting process to determine a contractors open single job and aggregate bonding capacities.

 

Court Bonds
A classification of surety bonds largely comprised of bonds required in civil or probate matters.  Bonds are required in a number of court proceedings to ensure financial protection against monetary loss.  Court bonds are often categorized by judicial bonds and probate bonds.  Judicial bonds are required in civil matters when a litigant seeks a special right or remedy in advance of a final court decision.  They are required by a party to a lawsuit to guarantee payment of losses which may arise from the delay or depravation caused by the legal proceeding.  Probate bonds, also termed as fiduciary bonds, are required when a party is acting on behalf of another individual or entity.  Probate bonds guarantee the ethical performance of the Principal to the bond with respect to carrying out their duties as the administrator, executor, trustee, or other court deemed designation.  Should the Principal be found to have caused a loss through fraud or malfeasance, the bond would reimburse those affected.

 

CPA
Abbreviation for Certified Public Accountant which is a designation given to accounting professionals by the American Institute of Certified Public Accountants.  It is a certification that the accountant has fulfilled all requirements set forth by State law as well as passed any required examination and/or work history requirements.  The financial statements generated by Certified Public Accountants are an important tool utilized by bonding companies during the underwriting process.

Credit Bureau
An agency that researches, collects, maintains and sells an individual’s credit information from various sources.   Credit Bureaus compile reports which highlight a person’s creditworthiness and other personal data.  Equifax, Experion and TransUnion are the most widely utilized credit bureaus in the United States.

Credit Report
A detailed report of an individual or companies credit history including past borrowing, payment history and their ability to repay borrowed money.  When qualifying for a surety bond or bond program, credit reports are typically accessed during the underwriting process.  An applicant’s credit history can affect their ability to acquire surety bonds or a bond program.

 

Credit Score
A statistically derived numerical expression of a person’s creditworthiness.  Credit scores reflect a person’s past credit files, repayment history and likelihood for payment of current debts.  Each credit bureau has a different scoring model due to varying formulas for weighing credit score factors.  Often, scoring models utilize dozens of different models based on the requirement of lenders or the end user.  An applicant’s credit score may impact their ability to procure a bond, as well as determine the premium rate that would be assessed.

 

D
Damages
A sum of money claimed or awarded in compensation for a loss or injury.  In the surety industry, damages are often related to paid bond claims.

 

Dealer Bonds
A surety bond required in most States as a means of becoming and maintaining an auto dealer license.  Surety bonds are commonly required by new and used vehicle dealers, motorcycle dealers, and all terrain dealers as well as dealers of mobile- homes.  47 states require auto dealer bonds prior to the issuance of a license.

 

Debt Collector Bond
A debt collector is also known as a collection agency.  It is an individual or entity that pursues the collection/payment of debts owed by individuals or businesses for a fee or percentage of the total amount owed.  32 states mandate debt collector bonds prior to the issuance of a collection agency or a debt collector license.  Because debt collector’s act as a third party to a monetary transaction, the bond is mandated to protect the general public against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the debt collector will comply with all State regulations and licensing requirements.

Defendant Bonds
A defendant is defined as an individual, company or institution sued or accused in a court of law.  Defendant bonds are required in civil matters when a litigant seeks a special right or remedy in advance of a final court decision.  Court bonds are mandated to ensure financial protection against monetary loss.  They are required by a party to a lawsuit to guarantee payment of losses which may arise from the delay or depravation caused by the legal proceeding.  The most common defendant bonds are Appeal or Supersedeas Bonds, Writ of Attachment Bonds, Counter -Replevin Bonds, Restraining Order/TRO Bonds, Indemnity to Sheriff Bonds and Court Costs Bonds.

 

Delay Damages
In construction, delay damages are also termed as liquidated damages and are often written into a contract as a monetary amount assessed on a daily basis to compensate for breach of contract.  Delay damages serve to ensure the contractor completes the project within the timeline agreed to in the contract.  Bonding companies underwrite the amount of delay damages based on their value versus the allotted time for completion on the project.  Generally, liquidated damages in excess of $1,500 per day are placed under more scrutiny than those less than that amount.

 

DMV
An abbreviation for Department of Motor Vehicles.  There are many DMV related surety bond requirements on a State by State basis.  See DMV bonds for further details.

 

DMV Bond
DMV is an abbreviation for Department of Motor Vehicles.  In most States, this governing agency is responsible for vehicle registration, drivers licensing and other occupational licensing.  Most DMV’s require various surety bonds.  Examples of DMV required bonds are new and used auto dealer bonds, certificate of title bonds, registration services bonds, business partner automation bonds, traffic school violator bonds, commercial requester account bonds engine/vehicle verifier bonds and wholesale dealer bonds.

 

DVBE – Disable Veteran Business Enterprise
A California State certified designation awarded to a businesses with ownership of at least 51% by a veteran of the United States military.  The veteran must have a service connected disability of at least 10% or more and must reside in the State of California.  The company’s operations must be managed and controlled by one or more disabled veterans.  The disabled veteran who manages and controls the business is not required to be an owner of the business.  State certified DVBEs are eligible for the State’s DVBE Participation Program. This program sets the goal to use DVBEs in at least three percent of the State’s overall annual contract dollars. State agencies may use a streamlined process known as the “SB/DVBE Option” by contracting directly with a California certified DVBE business for goods, services, information technology and public works projects. The solicitation must be valued at more than $5,000, and the State agency must obtain price quotes from at least two California certified DVBE businesses. For more information, see Government Code Sections 14838.5 and 14838.7.  The federal government, as well as many local, City, County, State and Federal municipalities will grant discounts on bid prices for contractors who possess a DVBE designation.

 

E
Employee Retirement Income Security Act (ERISA) Bond
ERISA, is a federal law passed in 1974 which mandates minimum standards for most voluntarily established pension plans. ERISA was enacted to protect employee benefit plans against loss by acts of fraud or dishonesty.  The statute instituted the requirement for persons overseeing plan funds to be covered under an ERISA bond.  An ERISA bond is categorized as a fidelity bond and the required penal sum of the bond is generally 10% of the plans assets.  Non-traditional or non-qualifying assets are required to be bonded at 100% of their value.

 

Errors and Omissions Insurance (E&O)
Errors and omission insurance is also termed as professional liability insurance which offers protection to an individual or company in the event a customer or clients makes a claim related to inadequate work or negligent actions.  The major difference between errors and omissions insurance and surety bonds is E&O serves to protect the purchaser of the policy where bonds cover a third party.  In addition, surety bonds cover fraud or criminal acts where E&O policies do not.

 

Escrow Licensee Bond
Escrow Licensee’s are considered a fiduciary in the transfer of property or money from one party to another.  Surety bonds are required in most States prior to the issuance or the maintenance of a license.  Because escrow licensee’s act as a third party to a monetary transaction, the bond is mandated to protect against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the escrow licensee will comply with all State regulations and licensing requirements.

Executor Bond
An executor is an individual appointed to administrate the estate of a deceased person. The executor’s main duty is to carry out the instructions and wishes of the deceased. The executor is appointed either by the testator of the will (the individual who makes the will) or by a court, in cases where there was no prior appointment.  The court may require an executor bond to guarantee the ethical performance of the executor respect to carrying out their duties.  Should the executor be found to have caused a loss through fraud or malfeasance, the bond would reimburse those affected.

 

F
Fidelity Bond
A surety bond protecting against losses sustained from dishonest acts, embezzlement or theft by employees.  Fidelity bonds are typically provided as blanket coverage applying to all employees however, individual employee dishonesty bonds are also available.
Fiduciary Bonds
A fiduciary is a person or entity who is entrusted, or legally, appointed to act on behalf of another individual or entity.  A fiduciary holds an ethical responsibility of trust over property or assets.  Examples of a fiduciary would be the administrator of an estate, a guardian over a minor or a trustee of a trust.  Because a fiduciary is in a position of trust over another individual or entity’s property or assets, a fiduciary bond protects the person for whom the fiduciary is representing.  A fiduciary bond is considered a fidelity bond and covers acts of fraud, dishonesty, embezzlement or theft.  Should the fiduciary be found to have caused a loss through fraud or malfeasance, the bond would reimburse those affected.

 

Finance Lender Bond
A surety bond required in nearly all States to secure or maintain a finance lender, mortgage broker, mortgage originator or supervised lender license.  The bond is mandated to protect against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the Principal will comply with all State regulations and licensing requirements.

 

Funds Control
With regard to construction projects, funds control, also known as funds disbursement or funds administration, is utilized as a means of overseeing a contractors proceeds on a job.  The fund control company acts as an independent third party to the contractor and surety . Under certain circumstances, bonding companies may require funds control to enhance a contractor’s bond program if they are exceeding their qualified single or aggregate parameters.  Generally, the funds control company will establish an escrow account and requires a letter of directive from the project owner to forward all progress payments from the job to the fund control company for deposit into the escrow account.  The fund control company assists the contractor with obtaining the proper paperwork required by the project owner as well as from all subcontractors and suppliers on the project, inclusive of lien releases.  Once the required paperwork has been collected, the fund control company will disburse payments to all subcontractors and suppliers and forward the balance to the contractor, aside from any required hold back. Funds control is considered a risk mitigating tool in the surety underwriting process.

 

G

GAAP
An abbreviation for Generally Accepted Accounting Principles, which are a common set of accounting principles, standards and procedures that companies use to compile their financial statements.  With regard to surety bonds, particularly in support of a contractor’s bond program, GAAP financials prepared by a Certified Public Accountant are more highly regarded than those generated by a contractor’s internal accounting system.

 

I
Immigration Consultant Bond
An immigration consultant is an individual who assists people to immigrate from one country to another in a legal manner.  The State of California requires all immigration consultants to file a $100,000 surety bond as a means of becoming and maintaining an immigration consultant designation in the State.

 

Improvement Bond
Also termed as a subdivision bond, completion bond or a plat bond, improvement bonds provide financial assurance to a public agency that the land owner or developer will fund and complete specified improvements through the development of a parcel of land.  In addition, improvement bonds often include a payment bond guarantee to cover monies owed to laborers, subcontractors and material suppliers.  See subdivision bond for additional information.

 

Income Statement
Also known as a profit and loss statement, an income statement is a financial report reflecting an individual or company’s financial performance over a specific period of time.  It accounts for revenues, cost of goods sold as well as other operating activities and expenses.  A key aspect of an income statement is it concludes profitability, or lack thereof.  Income statements are one of three components to a financial statement and are commonly accompanied by a balance sheet and statement of cash flows.  Each of these financial reports are valuable to the underwriting process when securing bonding.

Indemnity/Indemnification
A protection, security and/or promise to pay the cost of damage, loss or injury.  In most cases, bonding companies require indemnity agreements from clients as a means of guaranteeing they will be repaid for any losses they incur due to a bond claim.

 

Indemnity Agreement
With regard to obtaining surety bonds, an indemnity agreement, also referred to as a general indemnity agreement or GIA, is a formal document/contract between a principal to a bond (insured) and the bonding company or carrier.  The indemnity agreement obligates the named indemnitors to protect the surety company from any loss or expense the surety sustains as a result of having issued bonds on behalf of the bond principal.  If the principal fails to fulfill its bonded obligation and the surety suffers a loss, the indemnitors are legally bound to indemnify/repay the surety for its losses.

 

Injunction Bond
An injunction is a judicial order that restrains a person from beginning or continuing an action threatening or invading the legal right of another.  Injunction bonds are often required for reimburse the party which may sustain damages should the injunction not be upheld by the court.

 

Insurance Broker Bond
A surety bond required in most States which protects customers against illegal or unethical acts on behalf of an insurance broker/agent.

L

License and Permit Bonds
Also categorized by commercial bonds, license and permit bonds are a general classification of surety bonds that are not considered contract performance, payment or subdivision bonds.  There are thousands of license bonds which fulfill various license, permit and miscellaneous requirements nationwide.  These bonds are generally mandated by various federal, state, city and local municipalities.  In order for an individual or business to perform a particular activity, occupation or obtain a professional designation, they may be required to post a bond for issuance of a license or permit.  Common license, permit and miscellaneous bonds are Appraisal Management Bonds, Auction/Auctioneer Bonds, Auto Dealer Bonds, Collection Agency Bonds, Car Wash Facility Bonds, Certificate of Title Bonds, Commercial Fundraiser Bonds, Contractor’s License Bonds, Check Casher Bonds, Credit Services Bonds, DMV Bonds, ERISA/Pension Bonds, Escrow Licensee Bonds, Fidelity Bonds, Finance Lenders, Financial Guarantee Bonds, Insurance Broker Bonds, Lost Instrument Bonds, Medicare/DMEPOS Bonds, Money Transmitter Bonds, Mortgage Broker Bonds, Notary Public Bonds, Process Server Bonds, Public  Adjuster Bonds, Public Official Bonds, Sales Tax Bonds, Sport Permit Bonds, Surplus Lines Broker Bonds, Tax Preparer Bonds, Telemarketing Bonds, Title Agency Bonds, Used Auto Dealer Bonds, Wage and Welfare Bonds.
Liquidated Damages
In construction, liquidated damages are also termed as delay damages and are often written into a contract as a monetary amount assessed on a daily basis to compensate for breach of contract.  Liquidated damages serve to ensure the contractor completes the project within the timeline agreed to in the contract.  Bonding companies underwrite the amount of liquidated damages on a contract based on their value versus the allotted time for completion on the project.  Generally, liquidated damages in excess of $1,500 per day are placed under more scrutiny than those less than that amount.

 

M
Maintenance Bond
A maintenance bond is often referred to as a warranty bond.  Both maintenance bonds and warranty bonds protect a project owner from defective workmanship or material on a construction project subsequent to the jobs completion.  They serve as a guarantee that a contractor will either correct any defects that arise or compensate the owner for those defects.  Generally, maintenance bonds are required for one year after the project is completed.  Bonding companies do not highly regard maintenance bonds carrying terms greater than 2-3 years.  In some cases, maintenance bonds are required on a standalone basis where they serve more like a performance bond on specialty trade contracts.

 

Medicare/DMEPOS/ Durable Medical Equipment, Prosthetics, Orthotics or Supplies Bond
Most suppliers of medical equipment, prosthetics, orthotics and other medical supplies are required to post a $50,000 bond with the United States Department of Health and Human Services, Centers for Medicare and Medicaid Services.  The DMEPOS bond must be on file prior to their ability to bill Medicare.  These bonds are also termed Medicare or Medicaid bonds.

 

Minority Business Enterprise – MBE
State agencies provide technical and financial assistance to minority owned businesses so they can compete more successfully for Federal, State and local government and commercial contracts.  A Minority Business Enterprise/MBE is defined as a business which is owned, operated and controlled on a daily basis by one or more persons classified as an ethic minority.  In some cases the Federal Government, as well as many local, city, county, state and federal municipalities will grant discounts on bid prices for contractors who possess a MBE designation.
Miscellaneous Bonds
A classification of surety bonds not considered contract performance and payment bonds, subdivision bonds, license bonds or permit bonds.  Examples of the most common miscellaneous bonds are Car Wash Facility Bonds, Certificate of Title Bonds, Commercial Fundraiser Bonds, ERISA/Pension Bonds, Fidelity Bonds, Financial Guarantee Bonds, Lost Instrument Bonds, Sales Tax Bonds and Wage & Welfare Bonds.

 

Money Transmitter Bonds
A money transmitter or money transfer service is a business entity that provides money transfer or payment services.  48 States require money transmitter bonds at ranging amounts between $25,000 and $1 million.  The bond is mandated to protect against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the Principal will comply with all State regulations and licensing requirements.

 

Mortgage Broker Bond
A surety bond required in nearly all States to secure or maintain a finance lender, mortgage broker, mortgage originator or supervised lender license.  The bond is mandated to protect against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the Principal will comply with all State regulations and licensing requirements.

 

N
Net Worth
In accounting, net worth is an individual or entities assets less its liabilities.  Net worth is also known as shareholders’ equity.  With regard to surety underwriting, a consistent increase in net worth reflects a company in good financial health.

 

Notary Public Bonds
A public official surety bond required by many States to protect against losses to the public resulting from the improper actions, misconduct or mistakes made by a notary public.  Notary bonds do not cover errors or omissions made by the notary.

 

O
Obligee
With regard to surety bonds, the obligee is the person or entity to whom another is bound by contract, or other legal procedure.

 

Ordinance
A piece of legislation, code, authoritative decree, direction or decree set forth by a governmental authority.  Many State ordinances and codes mandate surety bond requirements.

 

Overbilling
A liability, also termed as billings in excess of contract cost, whereby a contractor has submitted pay requests on a project in excess of the revenue earned on the job at the reporting period.  Overbillings are included in the percentage of completion financial reporting method.  They are calculated through the review of a work-in-progress schedule.

 

P
Paid in Capital
Payments received or funds raised by the business or contributed by the stockholders through the company’s stock.  Paid in capital represents funds from equity and not funds raised by the ongoing operations of the business.

 

Payment Bonds
Payment bonds cover a contractor’s obligation under a contract to pay subcontractors, laborers, and materials suppliers associated with the project.  Since liens may not be placed on public jobs, the payment bond provides protection for those supplying labor or materials to a public job.

Penal Sum
Also termed bond amount or penalty with regard to surety bonds, the penal sum of a bond is a specified amount of money which is the maximum amount that the surety company is obligated to pay in the event of a principal’s default and/or bond claim.

 

Penalty
See penal sum or bond amount.

Pension Plan
A fund or retirement plan, generally tax exempt, wherein a person and/or their employer makes contributions of funds set aside for their future benefit.  Examples of pension plans are retirement plans or 401k plan.   With regard to surety bonds, the Employee Retirement Income Security Act, also known as ERISA, is a federal law passed in 1974 which mandates minimum standards for most voluntarily established pension plans.  ERISA was enacted to protect employee benefit plans against loss by acts of fraud or dishonesty.  The statute instituted the requirement for persons overseeing plan funds to be covered under an ERISA bond.  An ERISA bond is categorized as a fidelity bond and the required penal sum of the bond is generally 10% of the plans assets.  Non-traditional or non-qualifying assets are required to be bonded at 100% of their value.

 

Percentage of Completion
A financial reporting method where revenues and expenses on construction projects are recognized by the percentage of work that has been completed over the period time in which the financial statement is generated.  Percentage of completion financial reporting is a recommended accounting method by surety companies when underwriting a bond program for a contractor.

 

Performance Bonds
A performance bond is a legally binding instrument whereby a Bonding Company, (the Surety), guarantees to a project owner, (the Obligee), that a contractor will meet all terms and conditions set forth in a contract.  In addition, it mandates completion of the project within the time allowed and at the agreed price.  A performance bond is often required by the project owner, as a means of protecting the project owner from financial loss, should a contractor default and fail to complete the job.  Performance bonds are also termed as contract bonds, completion bonds, supply bonds and in some cases maintenance or warranty bonds.  Performance bonds are typically accompanied by a payment bond.

Plaintiff Bonds
A plaintiff is a person or entity that brings a case against another person or entity in a court of law.  Surety bonds may be required from a plaintiff in a legal matter to ensure protection to the defendant should the plaintiff not prevail in the matter.  They guarantee the plaintiff pay any damages that the defendant suffers due to the court proceeding.  The most common plaintiff bonds include Attachment Bonds, Claim and Delivery Bonds, Indemnity to Sherriff Bonds, Injunction Bonds and Replevin Bonds.

Plat Bond
Also termed as a subdivision bond, completion bond or improvement bonds, a plat bond provides financial assurance to the public agency that the land owner or developer will fund and complete specified improvements through the development of a parcel of land.  In addition, plat bonds often include a payment bond guarantee to cover monies owed to laborers, subcontractors and material suppliers.  See subdivision bond for additional information.

 

Power of Attorney
A document or authority used to appoint someone to make decisions or act upon another person or entities behalf.  Generally, surety bond agents or brokers are authorized as attorney-in-fact through a bonding company’s issuance of a power of attorney.  This power of attorney allows the agent/broker to execute approved surety bonds on behalf of the insurer.

Premium
With regard to surety bonds, premium is the amount of money a principal must pay to obtain a bond.   Premiums are charged by the bonding company based on rate filings they are obligated to complete with each State’s insurance regulating body.  Bond premiums are typically assessed based on the qualifications of the principal and are generally calculated as a percentage of the penal sum of the bond.

Principal
The party to a surety bond who is providing a guarantee to the Obligee that they will perform as contracted, licensed or permitted.

Probate Bonds

Probate is the court process by which the estate of a decedent is administered.  Where a person dies, their estate must undergo the probate process overseen by a court of law.  In general, the probate process involves the collection or liquidation of a person’s assets, satisfying their liabilities, paying required taxes and distributing assets to the beneficiaries of their estate.  Probate bonds, also termed as fiduciary bonds, are required when a party is acting on behalf of another individual or entity.  Probate bonds guarantee the ethical performance of the Principal to the bond with respect to carrying out their duties as the administrator, executor, trustee, or other court deemed designation.  Should the Principal be found to have caused a loss through fraud or malfeasance, the bond would reimburse those affected.

 

Process Server Bond
A process server is a person authorized by law to serve legal documents such as subpoenas, writs or warrants, particularly those which require a court appearance.  Most States or Counties require the posting of a process server bond prior to granting a process server designation.

 

Profit and Loss Statement
Also known as an income statement, a profit and loss statement is a financial report reflecting an individual or company’s financial performance over a specific period of time.  It accounts for revenues, cost of goods sold as well as other operating activities and expenses.  A key aspect of a profit and loss statement is it concludes profitability, or lack thereof.  Profit and loss statements are one of three components to a financial statement and are commonly accompanied by a balance sheet and statement of cash flows.  Each of these financial reports are valuable to the underwriting process when securing bonding.

 

Public Adjuster Bond
A public adjuster is a professional claims handler who advocates for the policyholder in appraising an insurance claim.   Several States require a public adjuster bond prior to the issuance of a license.

Public Official Bonds
A public official is a person who holds a position of official authority that is conferred by a State, City, County or other municipality.  They often hold a legislative, administrative or judicial position of sorts and is either elected or appointed.  Relative to surety bonds, notaries public are the most common public official.   A public official bond which provides indemnity for failure of a public official to faithfully perform their duties while properly managing funds they might oversee for the term of their designation.
R
Rates
Related to surety bonds, rate is the manner in which a bond premium is calculated.  Generally, it is calculated as a dollar value per thousand based on the penal sum of the bond.

Reclamation Bonds
A type of performance bond required by the Bureau of Land Management, or by a city, county, state or local municipality, which issues permits for mining operations.  Mine reclamation is the process of restoring land that has been mined to a natural or economically usable state.   Reclamation bonds ensure that tampered land will be restored and the bond protects the public’s environmental safety during and after mining exploration and operations.
Replevin Bond
Replevin is defined as a legal action to recover personal property said or claimed to be unlawfully taken or detained.  Replevin bonds are required by a court of a party to a lawsuit.  They guarantee payment of losses which may arise from the delay or depravation caused by the legal proceeding.

 

S
S Corporation
A subchapter S (S Corporation) is a form of corporation that meets the IRS requirements to be taxed under Subchapter S of the Internal Revenue Code.  In general, any profits earned by the corporation are not taxed at the corporate level but rather by the shareholders.

 

SBA
The abbreviation for the United States Small Business Administration. The SBA offers a program to assist construction companies to obtain bid, performance and payment bonds where the contactor may have not qualified for bonding in the standard marketplace.

 

Sporting Permit Bond
Promoters or organizers for boxing, wrestling, MMA, karate or other contact sporting events are often required to post a sporting permit bond.  The bond serves as a guarantee that the promoter will uphold its promises and obligations.  The bond is mandated to protect against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the Principal will comply with all State regulations and licensing requirements.

 

Status of Contracts
Also known as a work-on-hand or work-in-progress schedule /WIP, a status of contracts is a spreadsheet of all contracts/projects a contractor has ongoing at a specified date.  This schedule typically includes the job name, current contract price, total estimated costs on the job, costs incurred to date, amount billed to date, cost to complete, start date and estimated completion date for each project.  Status-of-contracts reports are a valuable surety underwriting tool.  A contractors “backlog” or cost to complete is generally considered when offering an aggregate program for construction related bonds or assessing the open balance of bonding capacity the contractor has at a given time.

Subcontract Bond
A performance and/or payment bond issued on behalf of a subcontractor in favor of a general contractor.  Similar to standard performance and payment bonds, subcontract bonds are most commonly required on construction related projects.  Generally, a subcontract bond includes both a performance bond and a payment bond.  A performance bond is a legally binding instrument whereby a Bonding Company, (the Surety), guarantees to a general contractor, that subcontractor will meet all terms and conditions set forth in a contract.  In addition, it mandates completion of the project within the time allowed and at the agreed price.  Subcontract performance bonds are typically accompanied by a payment bond.  Payment bonds are also legally binding instruments whereby the Surety Company, guarantees to a general contractor, that the subcontractor will pay all monies due to their subcontractors, laborers, and material suppliers on a project.  Payment bonds are also termed as labor and material bonds.  A growing number of general contractors have implemented procedures mandating subcontract bonds.  Through the underwriting process, bonding companies also mandate subcontract bond requirements.  It is a wise business practice in consideration of a potential default by the subcontractor.  Subcontract bonds are recommended for critical path subcontractors as well as those who have large subcontract values in comparison to the overall contract price.

 

Subdivision Bond
A subdivision is the process of dividing land into segments for development.  Subdivision bonds provide financial assurance to the public agency that the land owner or developer will fund and complete specified improvements through the development of a parcel of land.  In addition, subdivision bonds often include a payment bond guarantee to cover monies owed to laborers, subcontractors and material suppliers.  Subdivision bonds are also termed as site improvement bonds, completion bonds, performance bonds or plat bonds.  Subdivision bonds are required of property owners or developers by Cities, Counties or other governmental/public agencies.  Unlike standard performance and payment bonds, subdivision bonds transfer the financial burden of completing certain land improvements from the public entity to the property owner or developer.  Upon completion of such improvements, ownership is transferred to the governing public entity.  Examples of such improvements include, but are not limited to grading, street improvements, paving, curbs, gutters, sidewalks, storm drains, water mains, sewers, landscape, erosion control, and subdivision monumentation.  Public agencies regulate the design and improvements of land within their jurisdiction during the development process.  In order to develop a parcel of property, the property owner or developer must obtain a permit and/or subdivision map, also referred to as a plat, through the governing agency.  In many cases, the installation of public improvements is a condition imposed on a developer in order to proceed with the project.  This process typically requires a subdivision improvements agreement between the property owner or developer and the governing agency.  This agreement would stipulate the public improvements being required, as well as the time in which the land owner/developer has to complete the construction.  The subdivision bond amount is derived from the engineer’s estimate for the costs of the improvements or a percentage thereof.  Not all surety bond Carrier’s write subdivision bonds however, most that do issue them with an initial term of 2 years.  Thereafter, subdivision bonds renew annually until such time that the public entity requiring the bonds provides exoneration/release of the bond obligation to the Surety.

 

Supersedeas Bond
See appeal bond.

 

Supply Bonds
A surety bond which is required from a supplier to guarantee their performance under a contract or purchase order to furnish supplies and/or materials within the agreed time frame.  Supply bonds do not cover labor or installation.

Surety
In legal terms, surety is an individual or entity who undertakes an obligation to pay a sum of money or to perform a duty or promise on behalf of another individual or entity in the event that person fails to act or defaults on their duty or contractual obligations.

 

Surety Bonds
A contract among three parties.  The obligee is consider the “beneficiary” to the bond, the principal is the individual or entity required to perform a particular contract or obligation and the surety is an individual or entity who undertakes an obligation to pay a sum of money or to perform a duty or promise on behalf of another individual or entity in the event that person fails to act or defaults on their duty or contractual obligations.  There are thousands of varying surety bonds however, they are generally classified as contact bonds, subdivision bonds, license bonds, permit bonds and miscellaneous bonds.

 

Surplus Lines Broker Bonds

A surplus lines broker is licensed to place coverage with non-admitted insurers which are not licensed to transact business in a particular State.  Surety bonds are required in most States prior to the issuance of a surplus lines broker license.

 

T
Time for Completion
A fixed date or number of calendar or working days specified in a contract to complete or substantially complete a project. Surety companies underwrite time for completion based on the scope of work coupled with the ability of a contractor to perform the work within the allotted amount of time specified by the contract. Generally, if a contractor fails to complete or substantially complete a project within the term provided for completion, there are liquidated damages or delay damages assessed against them.  These damages are often specified as a monetary value on a per day basis.

 

Title Agency Bond
A title agency is an independent agency that can use and prepare title related documents for outside parties without bias.  Surety bonds are required in many States prior to the issuance of a license.  The bond is mandated to protect against acts of dishonesty, fraud, theft or malfeasance.  In addition, the bond serves to ensure that the Principal will comply with all State regulations and licensing requirements.

Treasury Limit
The United States Department of the Treasury publishes an annual circular of qualified companies who hold certificates of authority as acceptable sureties and reinsurance companies consistent with 31 CFR 223.16.  This circular contains information as to underwriting limitations, areas in which licensed to transact surety business and other details.  The treasury limit, also known as underwriting limitation, for a surety or reinsurance company is a monetary value under which they are approved to issue bonds.  A treasury limit or underwriting limitation is on per bond basis but does not limit the amount of a bond that a company can write. Companies are allowed to write bonds with a penal sum over their underwriting limitation as long as they protect the excess amount with reinsurance, coinsurance or other methods as specified at 31 CFR 223.10-11.

 

Trust
An arrangement in which one person holds property or assets of another for the benefit of a third party (beneficiary).

 

Trustee Bond
An individual or member of a board appointed to control or manage property and other assets held in trust.  A trust is an arrangement in which one person holds property or assets of another for the benefit of a third party (beneficiary).  Courts will often require a trustee bond to guarantee the ethical performance of the Principal to the bond with respect to carrying out their duties as the administrator, executor, trustee, or other court deemed designation.  Should the Principal be found to have caused a loss through fraud or malfeasance, the bond would reimburse those affected.

 

U
Underbilling
Underbilling is the reverse of overbilling.  It is considered an asset, also termed as costs in excess of billings, and represents total billings on a project less than the revenue earned on the job at during the reporting period.  Underbillings are included in the percentage of completion financial reporting method.   They are calculated through the review of a work-in-progress schedule.

 

Underwriting
With regard to surety bonds, underwriting is the process in which a principal becomes qualified to obtain a surety bond or bond program.  Every bonding company implements a unique underwriting model.

 

Underwriting Limitation
The United States Department of the Treasury publishes an annual circular of qualified companies who hold certificates of authority as acceptable sureties and reinsurance companies consistent with 31 CFR 223.16.  The treasury limit also known as underwriting limitation for an surety or reinsurance company is a monetary value under which they are approved to issue bonds.  A treasury limit or underwriting limitation is on per bond basis but this does not limit the amount of a bond that a company can write. Companies are allowed to write bonds with a penal sum over their underwriting limitation as long as they protect the excess amount with reinsurance, coinsurance or other methods as specified at 31 CFR 223.10-11.

 

W
Warranty Bond
A warranty bond is often referred to as a maintenance bond.  Both maintenance bonds and warranty bonds protect a project owner from defective workmanship or material on a construction project subsequent to the jobs completion.  They serve as a guarantee that a contractor will either correct any defects that arise or will compensate the owner for those defects.  Generally, warranty bonds are required to be effective for one year after the project is completed.  Bonding companies do not highly regard warranty bonds carrying terms greater than 2-3 years.  In some cases, warranty bonds are required on a standalone basis where they serve more like a performance bond on specialty trade contracts.

 

Women Business Enterprise – WBE
State agencies provide technical and financial assistance to minority owned businesses so they can compete more successfully for Federal, State, local government and commercial contracts.  A Women Business Enterprise/WBE is classified as a Minority Business Enterprise/MBE is defined as a business which is owned, operated and controlled on a daily basis by one or more persons of the female gender.  In some cases the Federal Government, as well as many local, City, County, State and Federal municipalities will grant discounts on bid prices for contractors who possess a MBE designation.

 

Work-On-Hand Reports
Also known as a status of contracts or work-in-progress schedule /WIP, a work-on-hand report is a spreadsheet of all contracts/projects a contractor has ongoing at a specified date.  This schedule typically includes the job name, current contract price, total estimated costs on the job, costs incurred to date, amount billed to date, cost to complete, start date and estimated completion date for each project.  Work-on-hand reports are a valuable surety underwriting tool.  A contractors “backlog” or cost to complete is generally considered when offering an aggregate program for construction related bonds or assessing the open balance of bonding capacity the contractor has at a given time.

 

Work Program
A term used in construction bonding which highlights the maximum total contract value a surety company will extend to a contractor on a single job basis as well as the aggregate sum of all contracts ongoing at any given time.

 

Working Capital
A measure of an individual or company’s current assets minus their current liabilities.  Working capital is a key component during the surety bond underwriting process.  Working capital is analyzed, among other factors, when determining a contractors single and aggregate bonding capacities.  Analyzed working capital is often debited and credited from a company’s financial statement through the underwriting process based on a number of factors.  Credits are often added to working capital for prepaid taxes and expenses that are not for purposes of payroll.  Sureties will debit from working capital for receivables over 90 days past due or those deemed to have collection issues and inventory assets are typically allowed at roughly 50% of their reported value.