Glossary of Surety Terms

A person or entity legally vested with the right of administration of an estate.

A form used to collect information in order to underwrite a risk.

The legal process of taking possession of a defendant’s property when said property is in dispute.

Balance Sheet
A financial statement listing assets, liabilities and net worth.

Bank Depository Bonds
Bonds guaranteeing the deposit of public funds.

Bankruptcy Trustee Bonds
Bonds which provide a guarantee to the beneficiaries of the bankruptcy action that the bonded trustees, appointed in a bankruptcy proceeding, will perform their duties and handle the affairs according to the rulings of the court.

Common types of bankruptcies are:

Chapter 7: calls for the “liquidation” of a business and allows for the sale of the assets to pay outstanding debts.

Chapter 11: calls for the “reorganization” of a business and the debtor remains in possession of the assets after the filing of a plan for the reorganization.

Bid Bonds
Bonds that guarantee that a contractor will enter into a contract at the amount bid and post the appropriate performance bonds. These bonds are used by owners to pre-qualify contractors submitting proposals on contracts. These bonds provide financial assurance that the bid has been submitted in good faith and that the contractor will enter into a contract at the price bid.

Blanket Bonds
Bonds that guarantee the honesty of all of the employees of an entity to the stated amount of the bond.

Blanket Position Bonds
Bonds that guarantee the honesty of each of the employees of an entity stated on the bond to the stated amount of the bond.

Blanket Public Official Bonds
Blanket public official bonds cover all public employees of the public entity stated on the bond to the stated amount of the bond.

Blanket Position Public Official Bonds
The blanket position public official bond covers each public employee of the public entity stated on the bond to the stated amount of the bond.

A term that refers to the size of a bond that a surety is able to write.

Commercial Bonds
A general classification of bonds that refers to all bonds other than contract and performance bonds. Commercial bonds cover obligations typically required by law or regulation. Each bond is unique to the circumstances at hand.

Commercial Blanket Bonds
These bonds provide a single amount of coverage to cover dishonest acts of employees, regardless of the number of employees involved in the loss. In other words, this type of bond covers all employees to the amount stated on the bond.

A person, official, or entity designated to take over and protect the interest of an incompetent or minor.

Contract Bonds
A general classification of bonds that are designed to guarantee the performance of obligations under a contract. These bonds guarantee the obligee that the principal will perform according to the terms of a written contract. Construction contracts constitute most of these bonds. Contract bonds protect a project owner by guaranteeing a contractor’s performance and payment for labor and materials.

Court Bonds
Refers to bonds required in some action of law.

Refers to monetary measure of harm or injury asserted by a claim.

The term that refers to the person or entity being accused in a court case.

Defendant Bonds
Defendant bonds counteract the effect of the bond that the plaintiff has furnished. They often require the posting of collateral to be written.

Employee Retirement Income Security Act (ERISA)
The 1974 federal legislation that created a requirement for a bond to be posted, in the amount of ten percent of the funds, on the fiduciary of pension funds and profit-sharing plans.

Errors and Omissions Insurance
A policy that guarantees coverage for an insured in the event of unintentional mistakes. Errors and Omissions Insurance, commonly referred to as E&O, covers damages arising out of the insured’s negligence, mistakes, or failure to take appropriate action in the performance of business or professional duties.

A person or entity appointed to execute a will.

Fidelity Bonds
Bonds designed to guarantee honesty. Generally, the bond guarantees honesty of employees. These bonds cover losses arising from employee dishonesty and indemnify the principal for losses caused by the dishonest actions of its employees.

One who is appointed to act in the best interests of another. A fiduciary is a person or entity appointed by the court to handle the affairs of persons who are not able to do so themselves. Fiduciaries are often requested to furnish a bond to guarantee faithful performance of their duties.

Fiduciary Bonds
Bonds that guarantee an honest accounting and faithful performance of duties by administrators, trustees, guardians, executors, and other fiduciaries. Fiduciary bonds, often referred to as probate bonds, are required by statutes, courts, or legal documents for the protection of those on whose behalf a fiduciary acts. They are needed under a variety of circumstances, including the administration of an estate and the management of affairs of a trust or a ward.

Funds Control
A method of taking control of a bonded project’s cash flow to ensure subcontractors and suppliers will be paid appropriately. This method may be used when the contractor would not otherwise qualify for a bond.

The act of holding another harmless in the event of a loss.

Individual Bonds
A term generally used with public official bonds, which refers to bonds written in the name of the specific public official.

Large Deductible Plans
A type of insurance program bond in which the insurer pays all losses, including those that fall within the deductible, and seeks reimbursement from the policyholder on a monthly or quarterly basis. The bond guarantees the policyholder will reimburse the insurer for losses within the deductible.

License and Permit Bonds
A general class of bonds required of a person or entity to obtain a license or a permit in any city, county, or state. These bonds guarantee whatever the underlying statute, state law, municipal ordinance, or regulation requires. They may be required for a number of reasons, for example the payment of certain taxes and fees and providing consumer protection as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.

Maintenance Bonds
Bonds that provide for the upkeep of the project for a specified period of time after the project is completed. These bonds guarantee against defective workmanship or materials. These bonds may occasionally include a guarantee of “efficient or successful operation” or other obligations.

A person who is not of legal majority.

Miscellaneous Bonds
A term used to refer to bonds that do not fit any of the other well-recognized categories of bonds.

Name Schedule Bonds
A type of public official or fidelity bond that lists the specific names and amounts of each named individual bonded. Name schedule bonds use one bond, but attach a schedule of individual names of the bonded public officials. Each name will list a specific dollar amount for which that individual is being bonded. These may be used to bond a panel of city council members or similar body of officials.

Name Schedule Public Official Bonds
Name schedule bonds use one bond, but attach a schedule of individual names of public officials being bonded. Each name will list a specific dollar amount for which that individual is being bonded. These may be used to bond a panel of city council members or similar body of officials.

Notary Public Bonds
Include bonds that are required by statutes to protect against losses resulting from the improper actions of notaries.

The person or entity for whom or which a surety guarantees the performance of the principal’s obligations.

Open Penalty
A term used to refer to the unlimited liability of the surety on a particular bond.

A municipal regulation.

Payment Bonds
Payment bonds guarantee payment of the contractor’s obligation under the contract for subcontractors, laborers, and materials suppliers associated with the project. Since liens may not be placed on public jobs, the payment bond may be the only protection for those supplying labor or materials to a public job.

A term used to refer to the monetary size or limit of bond.

A fixed sum of money regularly paid to a person.

Performance Bonds
Performance bonds guarantee performance of the terms of a contract. These bonds frequently incorporate payment bond (labor and materials) and maintenance bond liability. This protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions.

The person or entity that brings an action in a court of law.

Plaintiff Bonds
Plaintiff bonds are required of a plaintiff in an action of law. They generally guarantee damages to the defendant caused by the plaintiff’s legal action, should the court decide for the plaintiff.

Position Schedule Bonds
A type of fidelity or public official bond, which lists specific positions and their corresponding penalty amounts. Position schedule bonds use one bond, but attach a schedule of positions to be bonded. Each name will list a specific dollar amount for which that individual is being bonded. This type of bond may be used to bond certain positions that have a high amount of turnover. Using a position instead of a name will reduce the paperwork involved year-to-year.

A sum of money paid as consideration for an insurance policy or bond.

The individual required to be bonded by the obligee.

Public Official Bonds
A type of bond that guarantees a public official will act with honesty and/or faithful performance. These bonds are required by statutes and ordinances.

Public Official
One who holds public office.

The amount of money per thousand dollars (or percentage) used to determine the bond premium.

Reclamation Bonds
A bond that guarantees that a person or entity will restore land that it has mined or otherwise altered, to its original condition.

A legal proceeding used to recover specific personal property.

Retrospective Plan Bonds
Type of insurance program bond in which the final premium is a combination of incurred losses and an administrative charge. Retrospective plans are loss sensitive insurance plans. Since final loss costs may take years to develop, the bond guarantees payment of the final premium amount.

An acronym for the Small Business Administration. The SBA has a program to help small and minority owned contracting businesses obtain surety bonds.

Self-Insurers Retention Plan Bonds
A type of insurance program bond that is commonly used with Workers’ Compensation insurance, General Liability coverage or other liability coverage where limited coverage is available or coverage, when available, may not be affordable.

Supply Bonds
Bonds that guarantee performance of a contract to furnish supplies or materials. In the event of a default by the supplier, the surety indemnifies the purchaser of the supplies against the resulting loss.

A person or entity that guarantees the acts of another.

Surety Bonds
Surety bonds are three-party agreements in which the issuer of the bond (the surety) joins with the second party (the principal) in guaranteeing to a third party (the obligee) the fulfillment of an obligation on the part of the principal. An obligee is the party (person, corporation or government agency) to whom a bond is given. The obligee is also the party protected by the bond against loss.

Surety Industry
The surety industry is composed of contract surety business and commercial surety business. The products comprising each are sold through the same type of distribution system – agents and brokers.

Treasury Listing
A financial rating published by the federal government that lists the maximum size of federal bond a surety is allowed to write.

A trustee is a person or entity named to manage a business’ assets and work with the business creditors.

Work-On-Hand Reports
A type of financial statement or schedule that lists a contractor’s jobs in progress.

Workers’ Compensation Self-Insurers Bond
Workers’ Compensation laws, at the state and federal level, require employers to compensate employees injured on the job. An employer may comply with these laws by purchasing insurance or self-insuring by posting a workers’ compensation bond to guarantee payment of benefits to employees. This is a hazardous class of commercial surety bond because of its “long-tail” exposure and potential cumulative liability. The “long-tail” exposure stems from the two statutory bond forms:

Traditional – bond form
The surety is liable for payment of the principal’s workers’ compensation obligations occurring during the time the bond is in force. When the bond is canceled, the surety continues to have liability for all workers’ compensation claims incurred between the effective date of the bond and the cancellation date of the bond.

Last surety on – bond form
The surety assumes all past, present and future liability to pay the principal’s self-insurers workers’ compensation obligations. The surety is released from all accrued liability if the surety cancels the bond and the principal later posts an acceptable replacement security.

This glossary attempts to illustrate common usage of surety industry terms. These brief descriptions are not intended as legal interpretations. Consult Druml Group for more complete information.