Chapter 12 Bonds

Question 1

Bonds

Answer 1

Staff Adjusters and Independent Adjusters do not need bonds. In Texas, only Public Adjusters need a bond. An Adjuster Bond is a penal bond for a specific amount conditioned for the faithful and honest conduct of business by the licensed adjuster.

Bonds involve three parties. The three parties in the bonding process are as follows:

a. The principal - the party who has a duty to perform; also known as the obligor.
b. The surety - the party guaranteeing the performance by the principal. Also known as the guarantor.
c. The obligee - the party reimbursed by the surety if the principal fails to perform.

If a principal defaults, the surety must step in to guarantee or complete the work. The surety has a legal right of action against the principal until the amount of the loss is recovered. Therefore, suretyship involves the faithful performance of a principal guarantee by a surety company that agrees to “stand good” for the completion of an action to the satisfaction of the obligee. A defaulting party must repay the suretyship.

In addition, bonds are continuous instruments until they terminate in accordance with the conditions of the bond. There is no actual expiration date for a bond. They cannot be canceled.

No loss is anticipated with a bond. Premiums do not fund a reserve like insurance. A service fee is paid instead of a premium.

Bond Types

There are two types of bonds: Fidelity Bonds & Surety Bonds.

A Fidelity Bond is a form of insurance protection that covers PHs from losses that they incur as a result of fraudulent acts by specific individuals. Fidelity bond usually insures a business against dishonest or fraudulent acts of its employees. While called bonds. these obligations are really insurance policies. These policies protect businesses from losses of company monies, securities, and other property from employees who have a manifest intent to cause the company loss.

There are also many other forms of crime-insurance policies (burglary, fire, general theft, computer theft, disappearance, fraud, forgery, etc.) to protect company assets. However, it is important to note that these bonds are generally only paid out when a conviction is handed down.

Types of Fidelity Bonds:

Name Schedule Bond - these bonds cover each employee on the policy scheduled for the amount listed on the schedule.

Position Schedule Bond - these list positions in the company that are covered, rather than the individuals that fill the positions.

Commercial Blanket Bonds - these cover losses arising from the dishonesty of one or more employees acting separately or together. Neither the employees nor the positions are specifically named.

Blanket Position Bonds - these are similar to CBBs in those employees or positions are not specifically listed, however the bond’s limit applies separately to each employee involved in a loss.

Surety Bonds

Surety bonds are issued for persons doing contract construction, those connected with court actions, and those seeking licenses and permits. The surety bonds guarantees that the principal is honest and has the necessary ability and financial capacity to carry out the obligation for which he or she is bonded.

Types of Surety Bonds:

1. Contract Bonds - widely used by the construction industry but also well used within many service groups as well as supply, manufacturing and technology industries among others. These bonds guarantee the performance and/or payment of obligations under contract. There are generally 3 parts to the contact surety process; the bid bond, performance bond, and payment (contract) bond. The parts are used together but are all different.

Bid bond - issued as part of a bidding process by the surety to the contract “owner” or obligee. This is a good faith guarantee that says if the bidder is awarded the contract the bidder will fulfill the contract according to the bid terms, including the posting of the performance and payment bonds. Bid bonds are usually between five and ten percent of the full contract amount. Once the bid bond has been accepted & the contract is awarded most contracts allow for at least 10 days to supply the final payment and performance bonds. These are two separate bonds guaranteeing two separate issues, sometimes written as one bond but are still two separate obligations.

The Performance Bond is used to guarantee the schedule, workmanship, and completion of the contract outside of the penalties and corrective strategy laid out in the contract. The Payment Bond is used to protect the obligee from the principal’s sub contractors and suppliers.

The Payment Bond protects the obligee from having to pay twice. When payment is not made to a contractor’s subs or suppliers, they have a right to file a lien against the total project.

Question 2

Types of Contract Bonds

Answer 2

• Bid Bond
• Payment Bond
• Site Improvement Bond
• Supply Bond
• Maintenance Bond
• Subdivision Bond

Bond forms that have a standard cancellation clause & aggregate limit are often times instantly issued and require very little underwriting. Performance related issues and bond forms that are open ended or financial guarantees will take more UW such as financial and experience analysis.

A bond that is not a gov’t agency regarding a license or permit but has similar language is referred to as Miscellaneous, such as utility guarantees or tax bonds.

Court Bond

Some court proceedings require a bond in order to protect against financial loss for the party you are engaged against in court. Generically, court bonds refer to any court ordered bond. There are many types of bonds with different underwriting criteria, such as:

• appeal bond: When a court makes a financial judgment and an appeal has been made, the court will order an appeal bond be in place to protect the original financial judgment. This is for two reasons. One to guarantee the awarded party payment if the appeal is lost, and two is to hopefully stop wasting appeals. These bonds generally carry a 100% collateral requirement for non-account principles.
• custodial/guardianship bond: These bonds are required by the appointed guardian of an incapable person’s assets. Often times you will see this when a minor’s parent has passed and has left assets to the minor. The bond guarantees that the responsible party (new guardian or responsible adult/facilitator of the assets) will manage those assets in the minor’s best interest until they are an adult. These bonds can also be used for any incapable situation. The physically or mentally challenged, elderly or other reason for a court to deem someone incapable of correctly managing their own assets are other cases when these bonds might be required.
• probate/executor bond: These are required by the person who has been charged with the distribution of assets of one’s estate. There is an assumed fiduciary responsibility by the executor and this bond is to protect the estate’s assets from misuse.

Question 3

Crime Insurance

Answer 3

There are several crime definitions that are fundamental to crime insurance policies and the coverages provided. Some of the more important terms and definitions include the following:

Types of crime:

1. Burglary - the theft of property from within a premises that leaves visible marks or signs of forced entry.
   a. Most burglaries occur when the premises are unoccupied;
   b. Safe burglary is the unlawful taking of property from a locked safe or vault, evidenced by marks of forcible entry, or by removal of the entire safe or vault.
2. Robbery - The dishonest taking or stealing of property from an individual, in possession of that property. Robbery involves a face-to-face confrontation between the robber and the victim.
3. Theft - Any dishonest taking of property without an owner’s consent. Burglary and robbery are two forms of theft. Theft also includes the following definitions:
   a. Larceny - a theft that occurs when there is access to the area where the stolen property was located; such as shoplifting, dishonest domestic employees.
   b. Embezzlement - A fraudulent act that involves the unlawful appropriation of property or money by someone who has been entrusted with the property.
   c. Forgery - Involves the falsification of someone’s signature by another in order to illegally obtain property or money, such as signing someone else’s name to a check to obtain funds illegally.
4. Mysterious disappearance - This refers to a situation in which an article of property is known to have disappeared but it is impossible to determine how the disappearance occurred. In other words, the circumstances under which the disappearance occurred cannot be explained. This is not considered a theft.

Question 4

Commercial Crime Insurance

Answer 4

Crime coverage may be written as a monoline policy or added to a package policy. When added to the package policy, the common conditions & declarations apply. In addition, a crime declarations page and coverage form will be attached.

Crime General Provisions

1. General conditions - some of the more important conditions are:

a. Consolidation/merger: If through consolidation or merge any additional persons become employees or if the insured acquires control of addition premises, any coverage provided for the original employees & premises will apply to the new employees and/or premises for a period of 90 days. The insurer must be provided with written notice (and any additional premium) within this 90-day period for the additional coverage to continue.

b. Duties in the event of loss - the insured must notify the insurer as soon as possible. A sworn proof of loss must also be provided within 120 days of the loss. The insured may have to submit to an examination under oath and must cooperate with the insurer regarding any claim investigation. The police must be notified and a police report must be made when a loss occurs.

c. Legal action against insurer - no legal action may be taken against the insurer until 90 days after the insured has filed proof of loss. Action may not be taken later than the discovery of a loss.

d. Records - the insured must keep records of all covered property so an insurer can verify the amount of any loss.

e. Territory - Insurance covers only acts committed or events occurring within the US or Canada.

2. General exclusions

For all coverages, the insurer will not pay for:
- dishonest acts committed by an insured or partner;
- dishonest acts committed by an employee, except as covered by the employee theft coverage;
- seizure or destruction of property by order of governmental authority;
- indirect loss;
- expenses related to any legal action;
- confidential information;
- loss due to pollution;
- loss due to nuclear reaction; or
- loss due to war.

Question 5

Insuring Agreement

Answer 5

There are 10 standard insuring agreemeents:

1. Employee theft - covers theft of money, securities and other property by employees.
2. Forgery or alteration - this form pays for losses caused by outside parties who forge or alter the named insured’s checks. Forgery or alterations of checks performed by the insured, employees, managers, directors, trustees, or representatives are excluded.
3. Inside the premises, theft of money and securities - Pays for theft of money and securities within the insured premises or banking premises. No merchandise or stock is covered.
4. Inside the premises, robbery or safe burglary of money & securities - This applies to robery or attempted robbery of a custodian and to actual or attempted safe burglary and must take place within the premises.
5. Inside the premises, robbery or burglary of other property - This applies to actual or attempted robbery of a watchperson or burglary of property other than money, securities, and motor vehicles, trailers, or semitrailers, or equipment and accessories attached to them.
6. Outside the premises - Theft, disappearance, or destruction of money and securities while outside the premises and in the care and custody of a messenger or armored car company.
7. Premises burglary - Covers merchandise, furniture, fixtures, equipment, and all property on the business premises except money and securities.
8. Computer fraud - Covers money, securities, and other property and involves the use of any computer to fraudulently transfer covered property from the insured premises or a banking premises to somewhere else outside of the insured premises.
9. Fund transfer fraud - Pays for losses resulting from fraudulent instructions received by a financial institution to pay money from the insured’s transfer account to someone else.
10. Money orders & counterfeit paper currency - Has been broadened to include any currency, not just that of the US and Canada. The money must have been accepted in good faith in exchange for goods, money, or services.