Glossary & bond types

Surety bond

An agreement providing for monetary compensation should there be a failure to perform specified acts within a stated period.

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 money advanced in connection with a construction or supply bond or other type of contract.

Annual bond

One written to cover contractors or bids awarded or submitted during an annual period or for a period terminating within a fiscal year.

Application

A questionnaire which must be completed, when required, by an applicant for a bond. It gives the company 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.

Assets

The items on a balance sheet showing the book value of property owned. For a surety bond this could include all funds, property, securities, etc., or the property of an estate, whether real or personal.

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 bond. Default will ordinarily result in liability for the difference between the amount of the principal's bid and the bid of the next low bidder who can qualify for the contract. In any event, however, the liability of the surety is limited to the bid bond penalty.

Blanket fidelity bond

A bond which covers loss of money, merchandise, or other property owned by the insured or in which he/she has a pecuniary interest, when such loss is due to dishonesty of his/her employees. All employees are covered under the bond unless specifically excluded.

Blanket position bond

A blanket fidelity bond which covers all of the insured's employees for a uniform amount on each so that if loss is caused by dishonest or fraudulent acts of two or more employees in collusion, recovery up to the amount of the bond may be made on each identifiable participating employee.

Collateral

Anything of value pledged with the surety to secure it against loss by reason of default of the principal.

Commercial blanket bond

A blanket fidelity bond issued in a stated amount on all regular employees of commercial establishments covering against loss from employees' dishonest acts.

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 its benefit without an obligation to provide funds or to complete.

Condition

The technical name of one of the four parts of a bond. The condition is not a qualification of coverage as with an insurance policy, but is the essence of the guarantee.

Continuity clause

The clause in a bond, or rider attached to a bond, under which that bond, subject to its terms, assumes liability for any loss due to acts which occurred while a prior bond was in force, but which were not discovered until after the expiration of the discovery period of the prior bond.

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 materials—the former is known as a performance bond, and the latter as a payment bond.

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 or fraudulent acts were committed.

Discovery period

Under certain bonds and policies, provision is made to give the insured a period of time after the cancellation of a contract in which to discover whether a loss was sustained that would have been recoverable had the contract remained in force. This period usually varies from six months to three years. The period may be determined by statute; in certain bonds, it is of indefinite duration because of statutory requirement.

Dishonesty insurance

A generic term describing fidelity bond coverage guaranteeing against loss caused by dishonest officers or employees of a commercial firm or by dishonest public officials or employees.

Earned premium

The premium amount which would compensate the surety for the protection furnished for the expired portion of the term of the bond.

Effective date

The date from which bond coverage is provided.

Endorsement

A form attached to the bond to add to, alter, or vary its provisions. Sometimes called a rider.

Excess bond

Additional coverage over a primary bond protecting against certain perils (usually dishonesty) applying only to loss above a specified amount.

Exclusion

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

Executor

One named in a will to distribute and settle the estate of the testator.

Expense ratio

The percentage of the premium used to pay all costs of acquiring, writing, and servicing the bond.

Experience

The loss record of either an individual or a class of coverage.

Experience rating

A plan available for fidelity bonds whereby surcharges or discounts are applied to premiums developed by those risks based on the actual past experience of such risks.

Expiration

The date upon which a bond will cease to provide coverage unless previously cancelled.

Faithful performance bond

A type of bond where the coverage goes beyond protection against loss due to dishonesty or fraudulent acts of the principal; it provides protection to the named insured against loss by reason of the failure of the persons covered hereunder to faithfully perform their duties as prescribed by law or by the constitution and bylaws of the insured or their equivalent.

Fidelity bond

A bond which will indemnify an insured for loss caused by a dishonest act or fraudulent act of an employee covered under the bond. Also known as dishonesty insurance.

Fiduciary

A person who occupies a position of trust, particularly one who manages the affairs or 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 that guarantees payment of a sum of money whether or not the exact amount is known or stated. Common types are: court bonds (appeal, etc.) and lease bonds which guarantee payment of rent, etc.

Financial responsibility law

A statute requiring motorists to furnish, either before or after an accident, evidence of ability to pay damages. Such evidence may be furnished by a surety bond.

Financial statement

A balance sheet 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.

Fixed penalty bond

A bond for which the amount is expressed in terms of a stated and definite sum of money.

Hazard

A term applied to certain conditions which may create or increase the probability of a loss, because of a given peril.

Hold-over public officials

Those who are elected or appointed to succeed themselves in office or who continue beyond the limits of their terms until their successors are appointed or elected.

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 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.

Insuring clause

That part of a bond or policy which recites the agreement of the insurer to protect the insured against some form of loss or damage. Also known as an insuring agreement.

Intestate

One who dies without a legal will.

Joint control

An arrangement by written agreement between a fiduciary and a surety, acknowledged by the bank in which funds are deposited or 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 countersigned by an authorized representative of the surety and access to the securities can be had only in the presence of an authorized representative of the surety.

Joint venture

A joining of the financial resources and skills of several contractors to undertake contracts of construction too large for their individual and separate abilities.

Judicial bond

A general term applied to all bonds filed in court.

Labor and material bond

A bond given by a contractor to guarantee payment for the labor and material used in the work which he/she 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.

Liability

This is a broad term denoting any legally enforceable obligation.

License 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 a 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

A charge upon real or personal property for the satisfaction of a debt.

Limit of liability

The maximum amount which a surety company will pay in case of loss. Sometimes called the bond penalty.

Loss ratio

The percentage of losses to premiums.

Lost instrument 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 reinsurance 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.

Miscellaneous indemnity bonds

Bonds which do not fit any of the well recognized divisions or subdivisions.

Moral hazard

The possibility of loss caused or accentuated by dishonesty or carelessness of the insured or others.

Name schedule bond

A fidelity bond which covers the employees listed in a schedule, each for a specified amount.

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.

Obligor

Sometimes called the principal, or one bound by the obligation. Under a surety bond, both principal and surety are in a sense obligors, since the surety must answer if the principal defaults.

Outside employee

An employee, such as a salesperson, messenger, etc. whose duties keep him/her away from his/her headquarters.

Penal sum

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 bond which guarantees faithful performance of 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.

Personal surety

An individual who acts as surety for another, who may or may not charge a fee for his/her guarantee, and usually is not regulated by any government agency, such as is the corporate surety.

Power Of attorney

The authority given one person or corporation to act for and obligate another, to the extent set forth in the instrument creating the power.

Premium

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

Principal

The one who is primarily bound on a bond furnished by a surety company.

Pro rate 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.

Public official bond

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

Qualifying power

The largest net amount of risk which may be carried by a surety company on a bond.

Rate

The cost of a unit of bond coverage. Such unit is usually in the denomination of $1,000.

Rate manual

A book published by the Surety Association of America or by individual surety companies giving rates and classifications for bonds.

Recovery

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

Replevin - plaintiff's bond to secure

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

Replevin - defendant's bond to recover property replevied

Where personal property has been replevied, the defendant may, by the furnishing of a bond, regain possession of the property, pending final decision on the merits. The bond is conditioned for redelivery of property to the plaintiff, if ordered to do so, or otherwise to comply with a court order or judgment.

Rider

A printed form of special provision added to a bond. Sometimes called an endorsement.

Salvage

That which is recovered from the principal or an indemnitor to offset in whole or in part the loss and expense incurred by a surety in satisfying obligations it has sustained under a bond.

Short rate - short rate cancellation

The charge required for bonds taken for less than a year, and in some cases, the earned premium for bonds cancelled by the insured before the end of the term of the bond; i.e., the earned premium plus an expense charge.

Statutory bond

A term generally used describing a bond given in compliance with a statute. Such a bond must carry whatever liability the statute imposes on the principal and the surety.

Stay Of execution

A bond to stay or suspend execution on a judgment. It guarantees the payment of the judgment upon termination of the stay.

Surety bond

An agreement providing for monetary compensation should there be a failure to perform specified acts within a stated period.

Suretyship

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

Term

A period of time for which a bond is issued.

Testator

One who makes a will.

Third party bond

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

Treasury limits

These are qualifying limits imposed upon surety companies by the United States Treasury Department.

Trustee

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

Underwriter

An officer or employee of a surety company who has the responsibility for accepting risks.

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