11.2 Bond Types Copy

Bond Types

The many types of surety bonds available generally can be classified as contract bonds judicial or court bonds and miscellaneous bonds.

Contract Bonds

Contract Bonds are issued to guarantee performance of the terms and provisions of written contracts. Some of the more common contract bonds are described below.

Bid Bonds: A bid bond guarantees two things:

That the firm will enter into a contract if chosen, and
that it will secure a performance bond for the

Performance Bonds: A performance bond guarantees to the owner (obligee) that the contractor (principal) will complete the contract as drawn. If the original contractor fails to complete the work on time, the surety pays any losses that result from the delay in completion. If the principal fails to fulfill the agreement, the surety may hire another contractor to complete the work, the surety pays those expenses.

Payment Bonds: A completion bond guarantees that the lender (oblige) will be paid for any loans from the proceeds of the contracted work.

Supply Bonds: A supply bond guarantees that a supplier will faithfully furnish the supplies, materials, products or equipment required under a contract.

Judicial Bonds

Under the United States legal system, certain types of privileges are available only when a bond or another form of security has been furnished. Judicial bonds fall into two broad categories – Court (or litigation) and Fiduciary.

Litigation Bonds

Bail Bonds: When someone is arrested, he or she may be held in jail awaiting trial unless a bail bond has been furnished to the court. When issued, a bail bond guarantees that the person will appeal in court at the designated time and place. The court (federal, state or municipal) is the obligee. If the person fails to appear, the bond amount is paid to the court as penalty. Bail bonds usually require collateral to protect the sureties.
Court Bonds: Plaintiffs often are required to furnish court bonds to pursue legal actions. The court bond guarantees that the plaintiff will pay court costs and damages to the defendant if plaintiff loses the case.
Appeal Bond: If the losing party appeals a court case they lost, an appeal bond guarantees that the judgment will be paid if affirmed and that any court costs involving the appeal also will be paid.
Attachment Bond: In certain cases, a party to a legal action may obtain a court order that requires another party to turn over certain assets in satisfaction of a judgment. The court will not issue such an order until an attachment bond has been issued. The bond guarantees that if the action to attach the property was wrongful, any damages the other party suffers will be paid.
Release of Attachment: If the party whose property has been attached wishes to vacate the attachment, he or she must furnish a Release of Attachment bond. This bond guarantees that if the party is found to owe an obligation to another party, the first party will turn over property, but is not encumbered in the meantime.
Injunction Bond: A plaintiff also may seek an injunction against another party. However, a court requires that an injunction bond be furnished before it issues the injunction. This bond guarantees that damages will be paid to a defendant if it is decided that the injunction should not have been issued.

Injunction: A court order that orders a party to do or refrain from doing a certain act (or acts) as opposed to a money judgment.

Fiduciary Bonds

A fiduciary is someone who holds property in trust for another. Guardians may need to be bonded because they often are appointed by courts to handle the affairs of persons who are not capable of doing so themselves, such as minors or those who are mentally incompetent.

Fiduciary bonds also may be issued to receivers in bankruptcy cases or to trustees. Receivers and trustees may have to make decisions about how to use assets and pay debts

A fiduciary bond guarantees that the fiduciary will perform his or her duties faithfully and act in the best interest of the person he or she represents. A fiduciary protects the interest of a person who has a legal interest in the property being held in trust.

Administrator and executor bond: An administrator and executor bond may be issued when someone has been appointed to handle the affairs of a deceased person. An executor named in a will is obligated legally to carry out the provisions of that document. A court appoints an administrator when a person dies without a

Miscellaneous Bonds

Local, state, and federal laws require that a bond be furnished before someone can obtain a license or permit. A wide variety of license and permit bonds exist, but they can be classified into two broad categories. The first is bonds designed to guarantee that laws and regulations of particular business activities are carried out. Such bonds cover funeral directors, private detectives, real estate brokers, and insurance brokers. The second category is bonds that guarantee that certain taxes are paid, such as for the sale of gasoline, liquor, and tobacco products.

Public official bonds
Public official bonds guarantee that elected officials will perform the duties and obligations of their offices faithfully. If they misuse public funds or otherwise cause harm to the public, the sureties pay

Lost instrument bonds
Lost instrument bonds, also known as securities bonds, guarantee that if instruments are lost, stolen or destroyed; the owners of the securities will be indemnified. If an instrument is found later, the bond calls for the owner to reimburse the surety.

Motor vehicle bonds
Motor vehicle bonds may be issued when individuals must provide proof of financial responsibility for accidents. The bonds also are required for car dealers to guarantee that they will turn over motor vehicle registration fees collected as part of the sale of vehicles.

Self-insurer for workers’ compensation
When an entity has become a self-insurer for workers’ compensation it often must furnish a bond to the state to ensure that it will make benefit payments to injured employees.

Nature of Fidelity Bonds

Insuring Agreement – Fidelity bonds indemnify the insured (the employer) for losses resulting from employee dishonesty.

Bond Period – Fidelity bonds are usually continuous and do not have an expiration date.

Discovery Period – Most fidelity bonds have a discovery period, which means that covered losses must be discovered within a time period after the bond has terminated, or after coverage for the dishonest employee has terminated. The discovery period is usually one year.

Limits of Liability – Every fidelity bond is written with a stated amount of coverage or a limit of liability.

Valuation – Subject to the applicable limit of insurance provisions, the insurer pays for:

loss of money for not more than its face value;
loss of securities for not more than their value at the close of business on the day the loss was discovered; and
loss of property, loss from damage to property (other than money and securities) or loss from damage to the premises for not more than:
the actual cash value of the property on the day the loss was discovered;
the cost of repairing the property or premises; or
the cost of replacing the property with property of like kind and quality.

The insurer chooses the settlement method. If agreement cannot be reached, the matter is subject to arbitration.

Termination of Coverage – An entire bond may be cancelled at any time by employer or the insurance company. If the insurer cancels the bond, they are usually required to provide 15 or 30 days prior notice depending on the bond type.

Surety Bonds

Commercial Crime Coverage – Commercial crime coverage may be written as a mono-line policy or as part of a commercial package policy. There are only 18 major coverage forms, which may be combined in different ways under any of 10 coverage plans which are currently available.