Lesson 11: Surety and Fidelity Bonds - the Guarantee

Question 1

What is a guarantee

Answer 1

a formal promise or assurance that certain performances or conditions will be fulfilled

Question 2

What is a surety bond

Answer 2

a three-party agreement whereby a guarantor (insurer) assumes an obligation or responsibility to pay a second party (obligee) should the principal debtor (obligor) become in default. In short, a surety bond is a guarantee for others, paid by you. It also acts as an assurance to your customers to cover their projects should your company fail.

Question 3

Surety bond example

Answer 3

a type of contract that guarantees the fulfillment of an obligation such as
- A Guarantee of performance
Construction Example: building a bridge - job completions

Question 4

Difference between Surety Bonds and Insurance Companies

Answer 4

The surety bond contract guarantees the principal (obligor) will complete a performance (obligation) to the obligee. If an occurrence takes place where the performance is not met, the obligee can recover losses from the surety. The bonding company will subrogate against the principal (obligor).

On the other hand, insurance companies automatically assume to provide a guaranteed promise that the insured will be compensated in the case of a covered loss.

Question 5

Surety bond parties

Answer 5

Surety Bonds is a promise by a guarantor to pay the Obligee a particular amount (penalty) if an Obligor fails to meet some obligation. The surety bond protects the obligee against certain losses after the principal’s failure to meet the obligation.

Obligor (Principal): a person or business that is required to perform or fulfill a promise
Obligee: Party receiving the performance
Guarantor (Surety): The bonding or insurance company and pays the obligee the penalty

Question 6

What is a contract bond?

Answer 6

A bond that guarantees the contractors work, completion, and cost.

Question 7

What is a court or judicial bond?

Answer 7

Litigation: Bail bonds, Appeal Bonds, Injunction Bonds, Garnishment Bonds

Question 8

What is a fiduciary bond?

Answer 8

Covers: An Executor or Administrator of the deceased; Guardian- those who incapable of handling their own affairs; Receivers or Trustees

Question 9

What are license and permit bonds?

Answer 9

Bonds that are required by either federal, state or local laws to hold a license and permit and ensures that related taxes are paid and follow regulations. For example, a gas station must hold a liquor license and permit to sell alcohol to the public.

Question 10

Contract bond type - bid or proposal bond

Answer 10

a guarantee that a contractor provides to the project owner that shows the contractor (individual or company) is capable of accomplishing the task as specified in the agreement. It further demonstrates that the contractor can obtain a performance bond.

Question 11

Contract bond type - performance bond

Answer 11

guarantees that the contractor performs the work of the original contract as drawn. Providing the scope of work within the time and date specified.

Question 12

Contract bond type - payment or labor and material bond

Answer 12

Guarantees that the principle will deliver the work free and clear of liens or incumbencies. Ensures that the bills will be paid for the labor and materials will be used for the project.

Question 13

Contract bond type - completion bond

Answer 13

The contractor borrows money from a lender to fund a construction project. The bond guarantees that the loan will be paid back and used for the intended project.

Question 14

Contract bond type - supply bond

Answer 14

Guarantees that a supplier (principle) will faithfully furnish supplies and materials to the contractor (obligee) according to the terms of the contract.

Question 15

Nature of losses with surety bonds

Answer 15

We do not expect to have losses with Surety Bonds because of careful underwriting. The following are evaluated prior to issuing a Surety Bond: Character, Capital, Capability

Question 16

Additional Surety Standards

Answer 16

Discrimination: No insurer shall base its claims settlement practices, or standard of scrutiny and review, upon the claimant’s, age, race, gender, income, religion, language, sexual orientation, ancestry, national origin, or physical disability, or upon the territory of the property or person insured.

Accept/Deny: As soon as possible, but no later than 40-days, the insurer shall accept or deny the claim and affirm or deny liability.

Time Extension: In the event an insurer requires more time, the insurer shall provide the claimant with notice of the need for additional time.

Investigate: No insurer shall fail to pursue an investigation of a claim or persist in seeking information not required for or material to the resolution of a claim dispute.

Deny by phone w/o documenting: No insurer shall deny a claim upon information obtained in a telephone conversation or personal interview unless it is documented in the claim file.

Timing of Payments: Where the claim is to be settled by payment, such payment shall be rendered (1) within 15 days following affirmation of liability; (2) within 15 days following the insurer’s receipt of a release.

SOL: Except where a claim has been settled by payment, every insurer shall provide written notice of any statute of limitations.

Unlawful settlement: (h) No insurer shall attempt to settle a claim by making a settlement.

Question 17

Fidelity bonds

Answer 17

guarantees protection that businesses suffer because of dishonest acts by specified individuals or employees, such as theft or embezzlement.

A fidelity bond is a form of insurance protection that covers policyholders for losses that they incur as a result of fraudulent acts by specified individuals. It usually insures a business for losses caused by the dishonest acts of its employees.

Question 18

Who gets fidelity bonds

Answer 18

-Businesses
-Non-profits
-Churches

Other examples: mosques, red cross, volunteers, salvation army

Question 19

Types of fidelity bonds

Answer 19

Scheduled Fidelity Bond
Blanket Fidelity Bond (2 types: Commercial Blanket Bond, Blanket Position Bond)

Question 20

Scheduled Fidelity Bond

Answer 20

can be either a name schedule or position schedule. (To “schedule” something means to list it.) Fidelity bonds written on a name schedule basis list the names of the individuals to be bonded. When written on a position schedule basis, fidelity bonds list the positions to be bonded. The amount of the bond or penalty is also listed and can be different for each name and position.

Question 21

Blanket Fidelity Bond

Answer 21

provides blanket protection for an employer, covering all employees without exception. As a result, if a covered loss occurs, there is no need to identify the dishonest employee; the employer need only prove that the loss occurred.

Question 22

Commercial Blanket Bond

Answer 22

It provides for the bond’s penalty - its limit - to be the maximum amount applicable to any single loss, regardless of the number of employees involved. This is called an aggregate penalty because it aggregates, or collects, losses under an umbrella of a specified maximum amount for any single loss.

Although a loss does not reduce coverage for any future losses caused by other employees, no more coverage will be provided for future losses caused by someone who has already created a loss. Coverage is in effect whether dishonest employees act separately or in collusion. There is a one year discovery period.

Question 23

Blanket Position Bond

Answer 23

It provides for a specific individual penalty listed in the bond for each of the insured’s employees. This bond has a multiple penalty, which means that the payment of any one loss does not reduce the coverage offered for future losses that may occur due to the actions of other employees. There is a two year discovery period.

Question 24

Crime and Commercial Crime Insurance

Answer 24

this insurance protects businesses against property loss resulting from crimes such as burglary, robbery and theft

Question 25

Burglary

Answer 25

the forcible entry into or exit out of an insured’s locked premises, and the carrying away of property belonging to the insured. Burglary can also include the act of forcing a guard to open a locked premise.

Question 26

Robbery

Answer 26

is not simple theft. It is the forcible removal of an insured’s property from a messenger or custodian through violence or the threat of violence by any means that may injure or murder the messenger or custodian.

A messenger is defined as an insured, partner, officer, or any other employee of the insured who is authorized to have custody of the insured property outside the insured premises.
A custodian can be defined in the same way as a messenger inside the premises.
A guard or watch person means any person the insured retains specifically to have care and custody of property inside the premises and who has no other duties.

Question 27

Theft

Answer 27

a broad term that includes any unlawful taking of property, including the acts of burglary and robbery. The term “theft,” however, does not include all forms of stealing. For example, it usually does not include employee dishonesty.

Question 28

Mysterious Disappearance

Answer 28

as unexplained in the insurance world as it is in an old black-and-white detective movie – property simply vanishes with no known explanation.

Question 29

Certificate of Insurance

Answer 29

the legal document that attests to insurance coverage. It is a short-form summary of the coverage provided by the policy.

Question 30

Certificate of Insurance in property insurance

Answer 30

It can prove the existence of a master policy that provides protection for more than one person.

Example: Residents of the Cool Condominiums Community buy property insurance through their condominium association. The association then request separate Certificates of Insurance for each association member.

Question 31

Certificate of Insurance in casualty insurance

Answer 31

generally issued to demonstrate proof of liability coverage for a specific location or project. Example: A property owner decides to hire Really Good Remodelers to build an addition. Before signing the deal, the property owner requires PGR to provide a Certificate of Insurance.

Question 32

Umbrella/Excess Liability Policies

Answer 32

Umbrella policies are designed to protect an insured individual or business agent against catastrophic or disastrous claims. An umbrella policy provides low-cost coverage for liability risks that exceed primary coverage. Popular in recent years among upper and middle-management professionals. The umbrella usually provides coverage of at least a million dollars over and above the primary amount carried.

Question 33

The maximum amount of money the surety agrees to pay in case of loss due to the principal defaulting or failing to carry out its obligation is known as the

Answer 33

penalty

Question 34

A person the insured retains to have care and custody of property inside the premises and who has no other duties is

Answer 34

the watchperson

Question 35

If the principal does not appear in court as the bond guarantees, which of the following is true?

Answer 35

The surety will indemnify the obligee and proceed with subrogation in order to recoup the loss

Question 36

“Dishonesty Insurance” is popular name for:

Answer 36

fidelity bonds

Question 37

“Contractor Performance Bond” not provide?

Answer 37

Losses due to a dishonest act of an employee

Question 38

The bond that guarantees if securities or valuable papers handled by the principal are lost, destroyed or stolen the owner of the securities will be indemnified is known as the:

Answer 38

lost instrument bonds

Question 39

The person who is appointed by a court to take care of the estate of someone who has died without leaving a will is known as:

Answer 39

an administrator

Question 40

The bond that guarantees the owner (obligee) that the contractor will complete the original contract as drawn is the:

Answer 40

performance bonds

Question 41

Which is most like an insurance policy?

Answer 41

fidelity bond

Question 42

A position schedule bond, with respect to the principals:

Answer 42

mentions each job by name

Question 43

If any loss is covered under more than one coverage of the crime insurance, the most the insurer will pay is lesser of: one, the sum of the limits of applicable coverage, or two:

Answer 43

the actual amount of loss

Question 44

There is a period of time following termination of a fidelity bond during which a loss that occurred during the bond period that was not established until after the bonds termination, will still be covered. This period of time is known as the:

Answer 44

discovery period

Question 45

The bond that guarantees the lender (obligee) that the contractor-borrower will apply the funds to the project and complete the project free of any liens or encumbrances is known as the:

Answer 45

completion bond

Question 46

Which form would your client use to cover property, other than money and securities, which is stacked on open shelves from loss by breaking and entering the premises after business hours?

Answer 46

Premises burglary form

Question 47

A bid bond guarantees two (2) things will occur: one, the bidder will actually sign and accept the contract and two:

Answer 47

a performance bond will be issued