Ch 22 Surety Bonds

Payment Bond

Bond that may be required of a building contractor to compensate the property owner if the contractor defaults in performance of contract obligations, such as payment of subcontractors, workers, and suppliers.

Judicial Bond

Bonds required by a judge

Two types of Judicial Bonds

Litigation Fiduciary

A License bond

May be required by the government before issuing a particular type of license.

The obligee in a Cost Bond is the

defendant

Intestate

dying without a will

Surety Companies do not anticipate having ____ and are therefore not required by state regulators to maintain ____ to pay claims

losses; large cash reserves

Guardian's Bond

may be required if the court names a guardian to handle the affairs of an incompetent person.

The key underwriting factor for Surety Companies is the

moral character of the person being bonded.

Surety's rights if Principal forfeits the bond:

1. Obtain an injunction against Principal 2. Complete task and sue Principal 3. Pay the penal sum to Obligee and sue Principal

Supply Bond

A Surety bond which guarantees that a supplier will furnish supplies, products or equipment, sometimes including installation at price and quantity agreed upon

Completion Bond

A bond obtained by the contractor or owner, which guarantees that the project will be completed free of liens.

Contract Bonds

A category of Surety bonds, which guarantees the fulfillment of contractual obligations; includes Completion bonds, Bid bonds, Permit bonds, Performance bonds, Payment bonds and Supply bonds.

Public Official Bond

A commercial surety bond guaranteeing that a public official will perform his or her duties faithfully and honestly.

Performance Bond

A contract bond guaranteeing that a contractor's work will be completed according to plans and specifications.

Surety Bond

A guarantee that protects a business when another person or business fails to fulfill the terms of a contract between them

Attachment bond

A judicial bond guaranteeing that, if the court decides against a plaintiff who has requested attachment of the defendant's property, the defendant will be paid any damages that result from the property attachment.

Bid Bond

A surety bond guaranteeing that the bidder will sign a contract, if offered, in accordance with his or her proposal.

Bail Bond

An obligation signed by the accused, with sureties, to secure his presence in court.

Surety Company

Company who engages in a business which promises to pay the debt or satisfy an obligation of another.

Three basic categories of Surety Bonds

Contract Bonds Judicial Bonds Miscellaneous Bonds

Miscellaneous Bonds include:

Fidelity Bond License Bond Public Official Bond

Blanket Position Bond

Fidelity bond that specifies a single limit of Liability applicable to each employee involved in a loss.

Permit Bond

Guarantees that a contractor will comply with the governmental permit process

Cost Bond

Guarantees that the plaintiff will be able to pay the defendant's legal fees if the plaintiff loses a legal action.

Fiduciary Bonds include...

Guardian's Bond Executor's Bond Administrator's Bond

Fidelity Bond

Insurance coverage to protect a business from losses due to employee theft

Indemnity Agreement

Obligates the Principal to reimburse the Surety Company and gives the Surety Company the right to sue the Principal if the reimbursement does not occur

Obligee

One to whom the Principal is obligated. Will receive payment from Surety is the Principal defaults.

Service Fee

Premium paid for Surety Bond

The three (3) parties to a Surety Bond contract are:

Surety Company, Principal and the Obligee

Executor's bond

The named person to handle the probate (will) and may be required to post an Executor's Bond to protect the estate.

Administrator's Bond

The person appointed by the court to handle the estate in the event someone dies intestate (without will)

Injunction Bond

This bond is required by courts whenever someone seeks an injunction against another. It guarantees that if the injunction should not have been issued, damages will be paid to the injured party

Fiduciary Bonds guarantee

a representative will act faithfully and dutifully

Which bond assures that work done by the principal will be free of encumbrances and liens? Select one: a. completion bond b. fidelity bond

a. completion bond

Under default of an injunction bond, damages may be paid to the: Select one: a. defendant if the injunction was wrongfully issued. b. plaintiff if the injunction was wrongfully issued.

a. defendant if the injunction was wrongfully issued.

Fidelity Bonds cover acts of: Select one: a. employees b. customers

a. employees

The insured (obligee) under a Fidelity Bond is the? Select one: a. employer b. employee

a. employer

The surety will pay the bail bond's penal sum to the obligee if the principal: Select one: a. fails to show up for trial b. dies

a. fails to show up for trial

Which bond covers employee embezzlement? Select one: a. fidelity b. bid

a. fidelity

Blanket Position is a type of: Select one: a. fidelity bond b. bail bond

a. fidelity bond

Another name for the surety is the: Select one: a. guarantor b. principal

a. guarantor

The bond required of a person appointed by a court to handle the affairs of an incompetent person is the: Select one: a. guardian's bond b. fiduciary bond

a. guardian's bond

A fidelity bond will cover employee theft of: Select one: a. money or inventory stolen before employer discovers that the employee has been stealing b. money or inventory stolen after the employer first discovers that the employee has been stealing

a. money or inventory stolen before employer discovers that the employee has been stealing

The surety may also be referred to as an "indemnitor." If the principal defaults, the indemnitor is obligated to pay the penal sum to the: Select one: a. obligee b. obligor

a. obligee

Bail bond agents have a limit placed on the amount of money they may post as bail. This amount is determined by the: Select one: a. power of attorney given to the agent by the surety company b. principal

a. power of attorney given to the agent by the surety company

The Principal's nonrefundable premium paid for a surety bond is also known as the: Select one: a. service fee b. penal sum

a. service fee

A bail bond will be "forfeited" if the principal: Select one: a. skips town and doesn't appear on the trial date b. is arrested on other charges c. does not show up because the trial is postponed d. moves to another community

a. skips town and doesn't appear on the trial date

A Performance Bond is an example of a ________ bond. Select one: a. surety b. bid c. judicial d. bail

a. surety

The indemnity agreement allows: Select one: a. the Surety to sue the Principal b. the Surety to sue the Obligee c. the Obligee to sue the Surety d. the Principal to sue the Obligee

a. the Surety to sue the Principal

An obligee fails to make scheduled payments owing to a contractor (principal). As a result, the contractor refuses to continue with the construction. In this situation: Select one: a. the surety and the principal are both released of their obligations under the bond b. the penal sum will be paid by the surety to the obligee

a. the surety and the principal are both released of their obligations under the bond

Which of the following is FALSE? Select one: a. Surety companies may recover paid losses from the Principal b. Surety bonds and Insurance policies are both three party contracts c. The purpose of Surety bonds is to guarantee performance d. Surety companies do not expect to pay losses

b. Surety bonds and Insurance policies are both three party contracts

Which of the following can change the amount of the surety agent's bonding authority? Select one: a. The Principal. b. The surety company through the agent's power account/power of attorney/letter of attorney. c. The Insurance Commissioner.

b. The surety company through the agent's power account/power of attorney/letter of attorney.

Which of the following may post a bail bond? Select one: a. a licensed health insurance company b. a licensed surety company c. a licensed life insurance company d. a licensed property insurance company

b. a licensed surety company

Which bond guarantees that the bidder will sign the contract and provide a performance bond? Select one: a. contract bond b. bid bond

b. bid bond

The parties to a bond include each of the following EXCEPT: Select one: a. obligee b. donee c. surety d. principal

b. donee

The purpose of suretyship is: Select one: a. reinsurance b. guarantee

b. guarantee

The purpose of suretyship is: Select one: a. appraisal b. indemnity

b. indemnity

If a principal defaults and the surety pays the obligee, the principal is liable to the surety under the: Select one: a. coinsurance provision b. indemnity agreement

b. indemnity agreement

Bonds: Select one: a. cannot exceed one year b. may be written for any length of time agreed upon by the parties

b. may be written for any length of time agreed upon by the parties

Which of the following may post a bail bond? Select one: a. any individual with adequate cash b. only a licensed surety company

b. only a licensed surety company

In a bid bond, the contractor is the: Select one: a. obligee b. principal

b. principal

The indemnity agreement is designed to protect the: Select one: a. obligee b. surety

b. surety

Under a bond, the party who pays the insured for default is the: Select one: a. principal b. surety

b. surety

The bond's penal sum is paid by: Select one: a. the Principal to the Surety as payment for the bond b. the Surety to the Obligee if the Principal defaults

b. the Surety to the Obligee if the Principal defaults

Surety bond underwriters consider which of the following to be the most important issue when determining whether to issue a bond? Select one: a. the amount of capital owned by the applicant b. the applicant's moral character c. the applicant's professional experience d. the amount of collateral the principal may use to guarantee performance

b. the applicant's moral character

An employer has just discovered that an employee has stolen $15,000. The employee's fidelity bond covers only $10,000 of the loss. Who has first claim against the employee? Select one: a. the surety company for the $10,000 owing under the indemnity agreement b. the employer for the $5,000

b. the employer for the $5,000

Another name for the bond's premium is: Select one: a. the penal sum. b. the service fee.

b. the service fee.

Which is true regarding a bond if there is a default on the underlying contract and the surety is obligated to pay the penal sum? Select one: a. The surety is liable to the principal. b. The obligee is liable to the principal. c. The principal is liable to the surety. d. The obligee is liable to the surety.

c. The principal is liable to the surety.

Who can issue a bail bond? Select one: a. anyone with adequate funds b. the Insurance Commissioner c. a licensed surety agent d. the Principal

c. a licensed surety agent

Unlike property insurance policies, surety bonds: Select one: a. provide indemnity. b. transfer risk. c. are 3-party contracts. d. may involve a binder.

c. are 3-party contracts.

A government official handling money may be required to have a public official bond guaranteeing that the public official won't steal money. Which of the following city officials would most likely have to post a public official bond? Select one: a. city surveyor b. mayor's secretary c. city treasurer d. mayor

c. city treasurer

The Postal Service wants to guarantee that a contractor will be able to complete an addition to the post office according to the contract specifications. The contractor should purchase a: Select one: a. bid bond b. contract bond c. performance bond d. completion bond

c. performance bond

The surety agent's authority is controlled by the: Select one: a. Decision of the Insurance Commissioner. b. Instructions from the Principal. c. State law. d. Power of attorney, power account, letter of authority from the Surety Company.

d. Power of attorney, power account, letter of authority from the Surety Company.

To guarantee to the lender that a building contractor will complete the construction, the contractor should purchase which Surety Bond? Select one: a. completion b. bid c. bail d. performance

d. performance

To guarantee to the owner that a building contractor will complete the job, the contractor should purchase which Surety Bond? Select one: a. bail b. completion c. bid d. performance

d. performance

The party who agrees to pay the insured (obligee) for loss caused by employee embezzlement under a Fidelity bond is the: Select one: a. principal employee b. obligee employer c. obligor d. surety

d. surety

If the Obligee is the cause of the Principal's default, but the Surety and the Principal are

discharges of their obligations

Testate

the condition of leaving a will at death

Who is the Obligee in a bail bond?

the court

Penal Sum

the maximum amount the Surety will be required to pay in the event the Principal defaults. (Limit of Liability)

Principal

the party who has agreed to perform a specified task for the Obligee. Pays for the bond.

Unlike most insurance policies, bond are

three party contracts