Chapter 22

Question 1

A Performance Bond is an example of a ________ bond.

Select one:

a. judicial
b. surety
c. bail
d. bid

Answer 1

Performance bonds are required by the contract and thus are a type of contract bond.

The correct answer is: surety

Question 2

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
c. city treasurer
d. mayor’s secretary

Answer 2

Of the persons listed, the city treasurer is the one most likely to have access to cash. The others are much less likely to be in a position to steal money.

The correct answer is: city treasurer

Question 3

Which of the following can change the amount of the surety agent’s bonding authority?

Select one:

a. The Insurance Commissioner.
b. The surety company through the agent’s power account/power of attorney/letter of attorney.
c. The Principal.

Answer 3

New Point: To prevent a “rogue” surety agent from bailing every accused criminal in America out of jail, the surety company has a limit on the surety agent’s bonding authority. That limit is stated in what is known as the agent’s power account, that is, letter of authority, that is, power of attorney. Of course, the accused (the Principal) cannot increase the surety agent’s authority.

The correct answer is: The surety company through the agent’s power account/power of attorney/letter of attorney.

Question 4

Another name for the bond’s premium is:

Select one:

a. the penal sum.
b. the service fee.

Answer 4

The correct answer is: the service fee.

Question 5

The party who agrees to pay the insured (obligee) for loss caused by employee embezzlement under a Fidelity bond is the:

Select one:

a. obligor
b. surety
c. principal employee
d. obligee employer

Answer 5

The correct answer is: surety

Question 6

To guarantee to the lender that a building contractor will complete the construction, the contractor should purchase which Surety Bond?

Select one:

a. bail
b. bid
c. performance
d. completion

Answer 6

The Performance Bond (and not the Completion Bond) guarantees that the job will be completed as per the agreement. However, the Completion Bond guarantees to the lender that the money loaned will be used as agreed in the loan agreement. Most bonds have “easy to remember” names; not so for the sneaky Completion Bond.

The correct answer is: performance

Question 7

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.

Answer 7

The correct answer is: defendant if the injunction was wrongfully issued.

Question 8

Unlike property insurance policies, surety bonds:

Select one:

a. transfer risk.
b. provide indemnity.
c. may involve a binder.
d. are 3-party contracts.

Answer 8

Property policies are two-party contracts (Insurer and Insured). Liability policies are said to be three-party policies because the claim is paid not to the Insured but to the 3rd party victim.

The correct answer is: are 3-party contracts.

Question 9

The indemnity agreement allows:

Select one:

a. the Principal to sue the Obligee
b. the Obligee to sue the Surety
c. the Surety to sue the Obligee
d. the Surety to sue the Principal

Answer 9

The correct answer is: the Surety to sue the Principal

Question 10

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

Answer 10

The correct answer is: the Surety to the Obligee if the Principal defaults

Question 11

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 obligee is liable to the principal.
b. The obligee is liable to the surety.
c. The principal is liable to the surety.
d. The surety is liable to the principal.

Answer 11

The correct answer is: The principal is liable to the surety.

Question 12

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. obligor
b. obligee

Answer 12

A bond will never pay the principal. The principal is the “bad guy” whose default has resulted in the “forfeiture” of the bond. The Indemnitor will pay the obligee.

The correct answer is: obligee

Question 13

In a bid bond, the contractor is the:

Select one:

a. principal
b. obligee

Answer 13

The principal is the one who is primarily obligated to perform the job. The obligee is entitled to receive the performance and is the one who is paid if the principal “forfeits” the bond by failing to perform.

The correct answer is: principal

Question 14

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 penal sum will be paid by the surety to the obligee
b. the surety and the principal are both released of their obligations under the bond

Answer 14

The correct answer is: the surety and the principal are both released of their obligations under the bond

Question 15

The purpose of suretyship is:

Select one:

a. guarantee
b. reinsurance

Answer 15

The correct answer is: guarantee

Question 16

Fidelity Bonds cover acts of:

Select one:

a. employees
b. customers

Answer 16

The correct answer is: employees

Question 17

Which of the following is FALSE?

Select one:

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

Answer 17

See Pages 5-1, 22-3 and 22-4. Property insurance policies are two party contracts. The purpose of liability insurance is to pay a third party for damages the Insured causes to that person or to that person’s property. Thus, a liability policy is sometimes referred to as a three party contract. However, the actual contract is negotiated between two parties – the Insurer and the applicant. So it may also be said that liability insurance is a two party contract (between the Insurer and the Insured) with payment to a third. Surety bonds are agreed to by three parties and are always considered three party contracts.

The correct answer is: Surety bonds and Insurance policies are both three party contracts

Question 18

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 employer for the $5,000
b. the surety company for the $10,000 owing under the indemnity agreement

Answer 18

The Surety under a fidelity bond always agrees to wait to sue the employee under the indemnity agreement until the employer has sued the employee to collect any amount not covered by the bond.

The correct answer is: the employer for the $5,000

Question 19

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. performance bond
b. bid bond
c. contract bond
d. completion bond

Answer 19

The Performance Bond guarantees that a task will be completed on time as per the instructions. Watch out for the Completion Bond which should been called a “Lender’s Bond.” The Completion Bond doesn’t guarantee performance - it simply guarantees that a borrower will use the borrowed funds for the purpose promised.

The correct answer is: performance bond

Question 20

The parties to a bond include each of the following EXCEPT:

Select one:

a. donee
b. obligee
c. principal
d. surety

Answer 20

The parties to a bond are the principal, the obligee, and the surety. A donee is one who receives a donation - there is no such thing here.

The correct answer is: donee

Question 21

Which bond assures that work done by the principal will be free of encumbrances and liens?

Select one:

a. completion bond
b. fidelity bond

Answer 21

The correct answer is: completion bond

Question 22

Which bond covers employee embezzlement?

Select one:

a. bid
b. fidelity

Answer 22

The correct answer is: fidelity

Question 23

The surety agent’s authority is controlled by the:

Select one:

a. Power of attorney, power account, letter of authority from the Surety Company.
b. State law.
c. Instructions from the Principal.
d. Decision of the Insurance Commissioner.

Answer 23

New Point: Surety Companies limit the bonding authority of their agents by using an agent-specific account (called a power of attorney, letter of authority, or power account). This prevents a rogue surety agent from bailing every accused criminal out of jail across America. Of course, the accused criminals (the Principals) have no control over the surety agent’s bonding authority.

The correct answer is: Power of attorney, power account, letter of authority from the Surety Company.

Question 24

Bonds:

Select one:

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

Answer 24

The correct answer is: may be written for any length of time agreed upon by the parties

Question 25

To guarantee to the owner that a building contractor will complete the job, the contractor should purchase which Surety Bond?

Select one:

a. completion
b. bail
c. performance
d. bid

Answer 25

There are two correct answers: Contract Bond and Performance Bond. However, the Performance Bond is the “best” answer because it the most specific answer. A Performance Bond is one of the numerous Contract Bonds.

The correct answer is: performance

Question 26

Who can issue a bail bond?

Select one:

a. anyone with adequate funds
b. the Insurance Commissioner
c. the Principal
d. a licensed surety agent

Answer 26

Friends with lots of money can bail me out of jail but only a licensed surety agent can issue a bail bond. Of course, the Principal (the accused) may post bail but can’t “issue a bail bond.”

The correct answer is: a licensed surety agent

Question 27

The Principal’s nonrefundable premium paid for a surety bond is also known as the:
Select one:

a. penal sum
b. service fee

Answer 27

The correct answer is: service fee

Question 28

Which of the following may post a bail bond?

Select one:

a. any individual with adequate cash
b. only a licensed surety company

Answer 28

Although anyone with cash may post bail, only a licensed surety company can post a bail “bond.”

The correct answer is: only a licensed surety company

Question 29

Under a bond, the party who pays the insured for default is the:

Select one:

a. principal
b. surety

Answer 29

The correct answer is: surety

Question 30

Which bond guarantees that the bidder will sign the contract and provide a performance bond?

Select one:

a. contract bond
b. bid bond

Answer 30

The correct answer is: bid bond

Question 31

Which of the following may post a bail bond?

Select one:

a. a licensed property insurance company
b. a licensed health insurance company
c. a licensed life insurance company
d. a licensed surety company

Answer 31

The correct answer is: a licensed surety company

Question 32

The purpose of suretyship is:

Select one:

a. indemnity
b. appraisal

Answer 32

The correct answer is: indemnity

Question 33

A bail bond will be “forfeited” if the principal:

Select one:

a. skips town and doesn’t appear on the trial date
b. moves to another community
c. does not show up because the trial is postponed
d. is arrested on other charges

Answer 33

A bail bond pays if the bond is forfeited, that is, the principal skips and doesn’t show up for trial. The only answer where that occurs is “skips town and doesn’t appear on the trial date.”

The correct answer is: skips town and doesn’t appear on the trial date

Question 34

Blanket Position is a type of:

Select one:

a. bail bond
b. fidelity bond

Answer 34

Blanket position bonds are Fidelity Bonds designed to cover theft by all employees occupying a particular position within the company. There is probably no pressing need for a janitor Blanket Position Bond, but there may be a need for a bookkeeper Blanket Position Bond.

The correct answer is: fidelity bond

Question 35

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

Answer 35

The correct answer is: the applicant’s moral character

Question 36

The insured (obligee) under a Fidelity Bond is the?

Select one:

a. employer
b. employee

Answer 36

The correct answer is: employer

Question 37

Another name for the surety is the:

Select one:

a. principal
b. guarantor

Answer 37

The correct answer is: guarantor

Question 38

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

Answer 38

The correct answer is: power of attorney given to the agent by the surety company

Question 39

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

Answer 39

The Fidelity Bond (Employee Theft policy) stops coverage at the point the employer knows that the employee has been stealing.

The correct answer is: money or inventory stolen before employer discovers that the employee has been stealing

Question 40

The surety will pay the bail bond’s penal sum to the obligee if the principal:

Select one:

a. dies
b. fails to show up for trial

Answer 40

The correct answer is: fails to show up for trial

Question 41

If a principal defaults and the surety pays the obligee, the principal is liable to the surety under the:

Select one:

a. indemnity agreement
b. coinsurance provision

Answer 41

The correct answer is: indemnity agreement

Question 42

The bond required of a person appointed by a court to handle the affairs of an incompetent person is the:

Select one:

a. fiduciary bond
b. guardian’s bond

Answer 42

The correct answer is: guardian’s bond

Question 43

The indemnity agreement is designed to protect the:

Select one:

a. surety
b. obligee

Answer 43

The correct answer is: surety