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Insurance Adjusting > 4/D - Surety Bonds and Fidelity Coverages > Flashcards

4/D - Surety Bonds and Fidelity Coverages Flashcards

1
Q

Surety Bonds

A
  • Not insurance
  • May be sold by insurance companies
  • Part of an adjuster’s work
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2
Q

Suretyship

A

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

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3
Q

Parties to the Surety Bond Contract

A

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
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4
Q

Terms Used for Parties to the Surety Contract

A

Surety: the party that becomes legally liable for debt, failure, or default of another party

Surety Bond (Suretyship): the contract that establishes this liability

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5
Q

Indemnitor

A

Fourth party to a surety bond who agrees to reimburse the surety for losses sustained if the principal defaults

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6
Q

How Many Parties?

A

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
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7
Q

Right of Recourse

A

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
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8
Q

Right of Recourse (cont.)

A

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.
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9
Q

Cancelling the Contract

A

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
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10
Q

Penal Sum

A

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

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11
Q

Collateral

A

A principal’s cash or valuable property kept in reserve by the surety. In case of default, it is forfeit to the surety

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12
Q

Joint Control

A

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

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13
Q

Contract Bonds

A
  • 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
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14
Q

Judicial Bonds

A

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
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15
Q

Public Official Bond

A

Protects the public from a public official’s lack of performance

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16
Q

Customs Bond

A

Guarantees that an importer/exporter will pay all customs taxes and fees, and obey all regulations and laws

17
Q

Financial Guarantee Bond

A

Guarantees that principal and interest will be paid per the terms of the contract or promissory note

18
Q

Lost Instrument Bond

A

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

19
Q

Reclamation Bond

A

Guarantees the health, safety, and welfare of the public during and after mining operations, and guarantees land will be restored to original condition

20
Q

Self-Insurance Workers’ Compensation Bond

A

Pays workers’ comp claims filed by the self-insurer’s employees when the self-insurer itself cannot meet this obligation

21
Q

Faithful Performance of Duty Bond

A

Guarantees a principal will faithfully perform his duties as prescribed by law or the bylaws of the obligee

22
Q

Fidelity Bond

A
  • 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
23
Q

Coverage Options

A

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
24
Q

Covered Acts

A

Fidelity Bonds cover all dishonest acts committed by a covered employee, including:

  • Larceny
  • Theft
  • Embezzlement
  • Forgery
  • Misappropriation
  • Wrongful abstraction
  • Wilful misapplication
25
Q

Policy Period and Limits

A

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
26
Q

Scheduled Coverage

A

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
27
Q

Blanket Coverage

A

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
28
Q

Employee Retirement Income Security Act (ERISA)

A
  • 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
29
Q

Financial Institution Bonds

A

Used by:

  • Banks
  • Credit unions
  • Securities dealers
  • Finance companies
  • Insurance companies
30
Q

Standard Form 24

A

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)
31
Q

Standard Form 14

A

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
32
Q

Standard Form 15

A

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
33
Q

Standard Form 23

A

Eligible for a Standard Form 23:

  • Credit unions
  • National Credit Union Share Insurance Fund
34
Q

Standard Form 25

A

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
35
Q

Standard Form 28

A

Excess Bank Employee Dishonesty bond:

- Used with other bonds to provide excess coverage for employee fidelity

36
Q

Public Employee Bonds

A

Public Employee Dishonesty Coverage

  • Covers losses resulting from government employee dishonesty
  • Coverage Form O = per occurrence
  • Coverage Form P = per employee

Insurance Adjusting (46 decks)

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