Surety Bonds and Surplus Lines

Public Official Bonds

1. are required by law 2. guarantee that public officials will handle public money correctly and otherwise perform their duties faithfully and honestly

Surplus Lines Coverages

1. are those that are not available or cannot be procured from authorized insurers within a state 2. although surplus lines are considered an unregulated area of insurance, the business must be procured and conducted in accordance with surplus lines insurance law of the state

Surplus Lines Insurance Summary

1. each state insurance department determines which types of risks may be put in the surplus and excess market 2. insured usually must be given a disclosure stating that the policy is placed with a nonadmitted carrier 3. policies are usually not protected by state guaranty associations

Supply Bonds

1. guarantee that a supplier will furnish supplies, products, or equipment at an agreed-upon price and time

Two Categories of Nonadmitted Insurers

1. Authorized Nonadmitted Carrier (you need a surplus lines license and a property and casualty license issued by the resident state to sell for them) 2. Unauthorized Nonadmitted Carrier

Who Does a Surety Bond Protect?

1. Obligee

Three Parties To a Surety Bond

1. Principal: the one whose acts are being guaranteed by the bond (the party who promises to do or not do a specific thing) 2. Obligee: the one who collects if the principal fails to perform as guaranteed (the party to whom the principal makes the promise, and for whose protection the bond is written) 3. Surety: the one giving the guarantee (the party (usually the insurance company) that agrees to be responsible for loss that may result if the principal does not keep her promise) The agent is not a party to the bond

Court Bonds

1. a term that encompasses a variety of surety bonds that are used specifically for court proceedings 2. Two main categories: Fiduciary Bonds and Judicial Bonds

Surplus Lines Insurers

1. although surplus lines insurers are "Unauthorized", many states issue an approval list of surplus lines carriers and require brokers to place surplus lines business with those insurers

Principal (for Surety Bonds)

1. always the party that both arranges and pays for the bond for the benefit of the obligee 2. before a Surety Bond is issued, the principle must submit an application that contains not only the info needed for underwriting, but also an indemnity agreement

Indemnity Agreement

1. an agreement through which the principle agrees to indemnify the surety for any loss sustained 2. this is necessary because suretyship does not anticipate losses, although they do occur (instead, it is expected that the principal will perform as agreed and if not, that the principal will otherwise make it up to the obligee) 3. if the principal does deafault, however, the surety company will indemnify the obligee and then attempt to collect from the principal

License and Permit Bonds

1. are sometimes required in connection with the issuance of licenses by government agencies 2. guarantee that the person who posts the bond will comply will all applicable laws pertaining to their activities

Surety Bonds

1. emphasize that certain things will happen (rather than with a Fidelity Bond which is a guarantee that certain acts on the part of the employee will not be committed)

Payment Bonds

1. guarantee that bills for labor and materials will be paid by the contractor as they are due 2. sometime called Labor and Materials bonds 3. frequently included as part of a Performance Bond

Bid Bonds

1. guarantee that if a contractor's bid is accepted, the contractor will enter into a contract and provide the required Performance Bond 2. if the contractor does not take the job, the bond will agree to pay the difference between the selected contractor's bid and the bid that is then accepted

Performance Bonds

1. guarantee that jobs will be completed by contractor according to contract specifications

Completion Bonds

1. guarantee that when contractors borrow money to fund construction projects, the project will be carried out and the work will be delivered free and clear of liens or encumbrances

Contract Bonds

1. guarantee the fulfillment of contractual obligations Common among Contract Bonds are: 1. Bid Bonds 2. Performance Bonds 3. Payment Bonds 4. Supply Bonds 5. Completion Bonds

Collateral Security

1. in addition to the premium for Surety Bonds, in some cases the surety may require that the principal deposit money to protect against possible loss

Unauthorized or Nonadmitted Insurers

1. in almost every state, the insurance law makes exemptions that apply to certain transactions that may be legally conducted by unauthorized or nonadmitted insurers without requiring a Certificate of Authority These transactions usually include: 1. certain types of transportation and Ocean Marine risks 2. Reinsurance 3. Surplus lines coverages

Authorized or Admitted Insurers

1. insurers who are allowed to transact business in a state with having a current Certificate of Authority or license issued by the insurance department specifically authorizing the insurer to transact particular lines of business 2. transact traditional lines of insurance

What Does a Surety Bond Guarantee?

1. it guarantees the the Principal (also called obligor) is honest and has both the financial capacity and work expertise to satisfy the obligation for which he is bonded 2. it's essentially a guarantee of performance (by the Principal), or an assurance to the Obligee 3. usually, the Surety is a Casualty Insurance Company that lends its name and credit to guarantee the obligation between two parties

Judicial Bonds

1. protect individuals from possible losses pending the outcome of civil court proceedings 2. some are issued to plaintiffs and others to defendants (depending upon the case)

Fiduciary Bonds

1. required for guardians, administrators, trustees, and executors (all of whom are persons appointed by a court of law to manage the property and other assets of others)

Surety Bond Guarantees

1. someone will faithfully perform whatever he or she agrees to do, or 2. someone will make a payment as agreed upon by that person and another party

Premium

1. the premium paid is actually a charge for using the credit of the surety company (without allowances for losses) 2. in addition, in some cases the surety may require that the principal deposit money, called collateral security, to protect against possible loss

Key Difference Between Surety Bond and Fidelity Bond

1. with Surety Bonds, the principal is always the party that both arranges and pays for the bond for the benefit of the obligee (whereas with Fidelity Bonds, the obligee (employer) seeks and pays for the bond and the principal (the employee) often doesn't even know the bond exists)

Three Conditions To Be Met Before Surplus Lines Insurance May Be Obtained From An Unauthorized Insurer

Although there are variations from one state to another, generally three conditions must be met before surplus lines insurance may be obtained from an unauthorized insurer: 1. the business must be obtained through a licensed surplus lines broker 2. it is determined after a diligent search that the full amount of insurance cannot be obtained from authorized insurers who market the insurance in the state 3. coverage may not be obtained as a surplus lines coverage solely for the purpose of obtaining a better contract or a lower premium than an authorized insurer could provide