Bonding

The bonding process involves a concept called suretyship. Suretyship differs from insurance since it involves a three-party agreement, whereas insurance contracts involve two parties.

Suretyship also differs from insurance in that insurers expect losses to occur. A surety (the provider of a bond) does not expect losses. A surety will not issue a bond if it is likely that a loss will occur. There are two basic forms of bonds: surety bonds and fidelity bonds. The concept of bonding involves a guaranteed performance. If one party does not perform, the second party is protected by the surety (the third party).

The three parties involved in the bonding agreement include the principal, obligee and surety. The principal is the party whose performance is being guaranteed.

The party who is protected by the bond is called the obligee. The third party providing a financial guarantee is the surety.

Once purchased, surety bonds remain in effect until they are canceled or until the performance is completed according to the terms of the bond.

When a bond pays damages to the obligee, the surety has the right to recover from the principal any amounts paid according to the terms of the bond.

Fidelity Bonds protect employers from employees who act dishonestly. For example, a business will purchase a fidelity bond on its employees who handle and disburse cash.

Fidelity coverage may be secured by an employer by purchasing:

An individual bond identifying a specific employee
A schedule bond naming several employees
A bond naming employment positions (i.e., officers and directors)
A blanket bond that covers all employees with no specific names or employment positions designated

Surety Bonds

A surety bond is different than a fidelity bond, a fidelity bond is a guarantee that an employee will not commit certain acts; a surety bond guarantees that certain acts will happen, that someone will faithfully perform the act that they have agreed to perform. Surety bonds may be categorized in several ways, including:

Contract bonds
Judicial bonds
License and permit bonds
Public official bonds

Contract Bonds guarantee the performance of a principal to complete work according to the contract with an obligee. For example, assume the obligee is the City of Phoenix, and the principal is Behunin Construction Company. Behunin and the City of Phoenix have entered into an agreement that Behunin will complete the construction of a causeway. The City of Phoenix wishes to protect itself in case Behunin does not complete the work. Therefore, as a condition of receiving the Contract, Behunin must purchase a contract bond to guarantee its performance according to the agreement.

Judicial Bonds include court bonds and fiduciary bonds. These bonds guarantee that an individual or organization satisfies his, her or its obligations while acting in a position requiring trust and confidence. They fall into two general categories, Fiduciary and Litigation bonds.

Examples of Fiduciary bonds include:

• Executors

Executes the provisions of a will.

• Administrators

Appointed by the court when a person dies and does not leave a will with an appointed executor.

• Guardians

When parents are deceased, a person is usually appointed by the court to care for and manage the minors and the estate.

Litigation bonds (sometimes called Financial Guarantee bonds or Court bonds) are often difficult to place with a carrier because of the high risk. Examples include:

• Appeal Bonds

When one loses in court and is made to pay damages, he can post an appeal bond and postpone payment pending his appeal.

• Attachment Bonds

Prior to taking one’s property, which is the subject of litigation, the person taking the property must post this type of bond.

• Injunction Bonds

Posted with the court to stop some action or activity. Designed to pay damages if the person or business has been wrongfully affected.

• Bail Bonds

A civil bond which guarantees the return of someone’s appearance in court. They are also used in guaranteeing child support and alimony payments.

Lesson Summary

In the bonding process, a concept called suretyship is involved. Suretyship differs from insurance as it entails a three-party agreement, unlike insurance contracts that involve two parties.

Insurers expect losses in insurance contracts, while a surety (bond provider) does not expect losses.
A surety will not issue a bond if losses are likely.

There are two main types of bonds:

Surety bonds
Fidelity bonds

The concept of bonding ensures guaranteed performance. If one party fails to perform, the other party is protected by the surety, the third party involved.

The three parties in a bonding agreement are:

Principal: Whose performance is guaranteed
Obligee: Protected by the bond
Surety: Provides financial guarantee

Surety bonds stay effective until canceled or until performance is completed as per the bond terms. When a bond pays damages to the obligee, the surety can recover from the principal as per the bond terms.

Fidelity Bonds:

Protect employers from dishonest acts by employees handling money
Can be individual, schedule, employment position, or blanket bonds

Surety Bonds:

Differ from fidelity bonds by guaranteeing faithful performance of agreed-upon acts
Categories of surety bonds include contract, judicial, license and permit, and public official bonds

Contract Bonds:

Guarantee a principal’s performance as per a contract with an obligee
An example is Behunin Construction Company ensuring the completion of work for the City of Phoenix

Judicial Bonds:

Include Fiduciary and Litigation bonds
Fiduciary bonds involve Executors, Administrators, Guardians
Litigation bonds encompass Appeal, Attachment, Injunction, and Bail bonds

Chapter Vocabulary

Definitions

Blanket Bond: A bond that covers all employees. A type of fidelity bond.
Bond: A form of suretyship. Bonds of various types guarantee a payment or a reimbursement for financial losses resulting from dishonesty, failure to perform, and other acts.
Fidelity Bond: A bond covering an employer’s loss resulting from an employee’s dishonest act (e.g., loss of cash, securities, valuables, etc.).
Fiduciary: A person holding the funds or property of another in a position of trust and who is obligated to act in a prudent and ethical manner. Examples are attorney, bank trustee, or executor of an estate.
Fiduciary Bond: A type of surety bond, sometimes called a probate bond, which is required of certain fiduciaries, such as executors and trustees, that guarantees the performance of their responsibilities.
Financial Guaranty: A surety bond, insurance policy, or indemnity contract (when issued by an insurer), or similar guaranty types under which loss is payable upon proof of occurrence of financial loss to an insured claimant, obligee, or indemnitee as a result of failure to perform a financial obligation or any other permissible product that is defined as or determined to be financial guaranty insurance.
Obligee: The party reimbursed by the surety if the principal fails to perform.
Principal: In bonding, the party has a duty to perform.
Schedule Bond: A type of Fidelity Bond. The bond is available by a name schedule, which lists a number of persons by name, or a position schedule, which lists the positions to be bonded and the number of people in each position.
Surety: The company issuing a bond. Guarantees the performance of the principal.
Surety Bond: Guarantees the performance of a duty. It obligates the surety to hold itself responsible for the performance of a duty by the principal. Includes contract bonds, judicial bonds, public office bonds, and license and permit bonds.