4/D - Surety Bonds and Fidelity Coverages Flashcards
Surety Bonds
- Not insurance
- May be sold by insurance companies
- Part of an adjuster’s work
Suretyship
An arrangement between three parties, in which one party promises to perform for another party, and a third party guarantees that they will fulfill that promise
Parties to the Surety Bond Contract
Surety Bond: contract among at least 3 parties
- Principal (aka Obligor): agrees to fulfill an obligation
- Obligee: party to whom the principal owes the obligation
- Surety (aka Guarantor): guarantees to pay obligee if principal defaults
Terms Used for Parties to the Surety Contract
Surety: the party that becomes legally liable for debt, failure, or default of another party
Surety Bond (Suretyship): the contract that establishes this liability
Indemnitor
Fourth party to a surety bond who agrees to reimburse the surety for losses sustained if the principal defaults
How Many Parties?
3 main differences between suretyship and insurance:
Insurance:
- 2-party contract
- Insurer can’t recoup settlement payments from insured
- Insurer can cancel
Suretyship:
- At least 3 parties
- Surety can seek recompense from principal
- Surety can’t cancel
Right of Recourse
3 main differences between suretyship and insurance:
Insurance
- 2-party contract
- Insurer can’t recoup settlement payments from insured
- Insurer can cancel
Suretyship
- At least 3 parties
- Surety can see recompense from principal
- Surety can’t cancel
Right of Recourse (cont.)
Salvage: surety’s financial recovery from a principal who has failed to perform as promised
- Right of recourse doesn’t guarantee that the surety can recoup losses form a principal who defaults
- Surety companies manage their risk by thoroughly scrutinizing a principal’s previous performance, credit history, licenses, character references, etc.
Cancelling the Contract
3 main differences between suretyship and insurance:
Insurance
- 2-party contract
- Insurer can’t recoup settlement
- Insurer can cancel
Suretyship
- At least 3 parties
- Surety can see recompense
- Surety can’t cancel
Penal Sum
Specified maximum amount that a surety might have to pay if the principal fails to perform as promised
- Principal pays the surety an annual premium that reflects the risk the surety is taking and the penal sum
Collateral
A principal’s cash or valuable property kept in reserve by the surety. In case of default, it is forfeit to the surety
Joint Control
Surety and principal share control of the bonded project
Note - The surety may reserve the right to regularly audit all disbursements, or even co-manage actual work
Contract Bonds
- Most common type of surety bond
- Guarantees a specific contract
- Common in construction and supplying goods
Types of contract bonds:
- Bid bond: principal can complete project if his bid is selected
- Performance bond: guarantees completion of project
- Payment bond: guarantees payment of contract labor & materials
- Subdivision bond: contractor will meet all public works requirements
- Maintenance bond: principal will correct any defects after project is done
- Completion bond: funds loaned for project will be used only for project
Judicial Bonds
Types of Judicial Bonds:
- Fiduciary bond: Guarantees work of someone appointed to take financial responsibility for others
- Court (aka Litigation) bond: Often required of litigants in civil suits to protect opposing parties
a. Bail bond: Court bond that guarantees appearance of a defendant in court
b. Appeal bond: purchased to postpone payment of damages during the appeal process
c. Attachment bond: protects against damage to property taken as part of the litigation process
d. Injunction bond: pays damage if a person or business is wrongly affected by a court action
e. Replevin bond: assures the return of property to its rightful owner
Public Official Bond
Protects the public from a public official’s lack of performance
Customs Bond
Guarantees that an importer/exporter will pay all customs taxes and fees, and obey all regulations and laws
Financial Guarantee Bond
Guarantees that principal and interest will be paid per the terms of the contract or promissory note
Lost Instrument Bond
Guarantees that an issuer of a replacement for a lost financial instrument will not suffer an economic loss if the owner of the instrument later finds and negotiates the original
Reclamation Bond
Guarantees the health, safety, and welfare of the public during and after mining operations, and guarantees land will be restored to original condition
Self-Insurance Workers’ Compensation Bond
Pays workers’ comp claims filed by the self-insurer’s employees when the self-insurer itself cannot meet this obligation
Faithful Performance of Duty Bond
Guarantees a principal will faithfully perform his duties as prescribed by law or the bylaws of the obligee
Fidelity Bond
- Guarantees the principal (employee) will NOT do something
- Written on “Employee Theft and Forgery Policy” form
- Similar to commercial crime insurance
In a Fidelity Bond:
- Principal = the employee
- Obligee = the employer
- Surety = the insurer
Coverage Options
Employer buys the bond, and the insurer pays the employer if employee commits certain acts.
Coverage options under Fidelity Bond:
- May be “scheduled” or “blanket” coverage
- “Loss sustained” or “discovery” trigger
Covered Acts
Fidelity Bonds cover all dishonest acts committed by a covered employee, including:
- Larceny
- Theft
- Embezzlement
- Forgery
- Misappropriation
- Wrongful abstraction
- Wilful misapplication
Policy Period and Limits
Policy Period
- Typically from 12:01 a.m. on inception date to 12:01 a.m. on the same day of following year (or until cancelled)
Limits
- “Single Loss” - all loss caused by the same person resulting from a common series of actions
- “Aggregate Limit” - total amount for all losses discovered during policy period
Scheduled Coverage
Scheduled Fidelity Bonds
- Applicable to only select employees or positions
- Employees can be bonded for different amounts
- Limit of liability is per name/position scheduled
- Premiums based on amount of coverage, number of individuals scheduled and their coverage amounts, business activities of the insured, and deductible amount
- Typically used in businesses where employees have greater responsibilities or handle large sums of money
Blanket Coverage
Blanket Fidelity Bonds
- Cover ALL EMPLOYEES of the named insured unless specifically excluded
- New employees are automatically covered
- All employees are bonded for same aggregate amount
- Limit applies per occurrence
- Premium based on amount of coverage requested, total number of ALL employees, insured’s business activities, and amount of deductible
- Common uses for blanket bonds include businesses with large numbers of employees and organizations with voluntary or honorary positions
Employee Retirement Income Security Act (ERISA)
- Regulates employee benefit and pension plans
- Requires bonding for anyone acting as a plan fiduciary or otherwise handling money and other property for this type of plan
Financial Institution Bonds
Used by:
- Banks
- Credit unions
- Securities dealers
- Finance companies
- Insurance companies
Standard Form 24
Eligible for a Standard Form 24:
- National and state commercial banks
- Trust companies
- American agencies for foreign banks
- Title insurance companies that accept deposits or act as trust companies
- Federal Reserve banks
- Federal home loan banks
- Savings banks (by rider)
- Savings and loan associations (by rider)
Standard Form 14
Eligible for a Standard Form 14:
- Stockbrokers of securities listed on stock exchanges
- Stock exchanges
- Securities investors
- Investment bankers and trusts
- Mutual funds
- Commodity brokers
- Stockbrokers operating on a partnership basis
Standard Form 15
Eligible for a Standard Form 15:
- Finance companies who primarily finance paper for and through dealers and those licensed under the Small Business Administration Act
- Small loan companies
- Mortgage bankers
- Title Insurance companies principally engaged in mortgage business
- Holding companies who act as the managers of stocks and securities of others
- Real estate investment trusts
Standard Form 23
Eligible for a Standard Form 23:
- Credit unions
- National Credit Union Share Insurance Fund
Standard Form 25
Eligible for a Standard Form 25:
- All types of insurance companies
Includes several insuring agreements:
- Fidelity: employees’ fraudulent or dishonest acts
- On Premises: burglary, robbery, unexplained disappearance, damage, or theft by someone on the premises
- In Transit: loss of property in the care of a messenger or transportation company
- Forgery or alteration: direct losses caused by forgery or alteration of specified items
- Securities: losses from dealing in securities that have been forged, altered, lost, stolen
Standard Form 28
Excess Bank Employee Dishonesty bond:
- Used with other bonds to provide excess coverage for employee fidelity
Public Employee Bonds
Public Employee Dishonesty Coverage
- Covers losses resulting from government employee dishonesty
- Coverage Form O = per occurrence
- Coverage Form P = per employee
