4/D - Surety Bonds and Fidelity Coverages

Question 1

Surety Bonds

Answer 1

• Not insurance
• May be sold by insurance companies
• Part of an adjuster’s work

Question 2

Suretyship

Answer 2

An arrangement between three parties, in which one party promises to perform for another party, and a third party guarantees that they will fulfill that promise

Question 3

Parties to the Surety Bond Contract

Answer 3

Surety Bond: contract among at least 3 parties

• Principal (aka Obligor): agrees to fulfill an obligation
• Obligee: party to whom the principal owes the obligation
• Surety (aka Guarantor): guarantees to pay obligee if principal defaults

Question 4

Terms Used for Parties to the Surety Contract

Answer 4

Surety: the party that becomes legally liable for debt, failure, or default of another party

Surety Bond (Suretyship): the contract that establishes this liability

Question 5

Indemnitor

Answer 5

Fourth party to a surety bond who agrees to reimburse the surety for losses sustained if the principal defaults

Question 6

How Many Parties?

Answer 6

3 main differences between suretyship and insurance:

Insurance:

• 2-party contract
• Insurer can’t recoup settlement payments from insured
• Insurer can cancel

Suretyship:

• At least 3 parties
• Surety can seek recompense from principal
• Surety can’t cancel

Question 7

Right of Recourse

Answer 7

3 main differences between suretyship and insurance:

Insurance

• 2-party contract
• Insurer can’t recoup settlement payments from insured
• Insurer can cancel

Suretyship

• At least 3 parties
• Surety can see recompense from principal
• Surety can’t cancel

Question 8

Right of Recourse (cont.)

Answer 8

Salvage: surety’s financial recovery from a principal who has failed to perform as promised

• Right of recourse doesn’t guarantee that the surety can recoup losses form a principal who defaults
• Surety companies manage their risk by thoroughly scrutinizing a principal’s previous performance, credit history, licenses, character references, etc.

Question 9

Cancelling the Contract

Answer 9

3 main differences between suretyship and insurance:

Insurance

• 2-party contract
• Insurer can’t recoup settlement
• Insurer can cancel

Suretyship

• At least 3 parties
• Surety can see recompense
• Surety can’t cancel

Question 10

Penal Sum

Answer 10

Specified maximum amount that a surety might have to pay if the principal fails to perform as promised
- Principal pays the surety an annual premium that reflects the risk the surety is taking and the penal sum

Question 11

Collateral

Answer 11

A principal’s cash or valuable property kept in reserve by the surety. In case of default, it is forfeit to the surety

Question 12

Joint Control

Answer 12

Surety and principal share control of the bonded project

Note - The surety may reserve the right to regularly audit all disbursements, or even co-manage actual work

Question 13

Contract Bonds

Answer 13

• Most common type of surety bond
• Guarantees a specific contract
• Common in construction and supplying goods

Types of contract bonds:

• Bid bond: principal can complete project if his bid is selected
• Performance bond: guarantees completion of project
• Payment bond: guarantees payment of contract labor & materials
• Subdivision bond: contractor will meet all public works requirements
• Maintenance bond: principal will correct any defects after project is done
• Completion bond: funds loaned for project will be used only for project

Question 14

Judicial Bonds

Answer 14

Types of Judicial Bonds:

• Fiduciary bond: Guarantees work of someone appointed to take financial responsibility for others
• Court (aka Litigation) bond: Often required of litigants in civil suits to protect opposing parties
  a. Bail bond: Court bond that guarantees appearance of a defendant in court
  b. Appeal bond: purchased to postpone payment of damages during the appeal process
  c. Attachment bond: protects against damage to property taken as part of the litigation process
  d. Injunction bond: pays damage if a person or business is wrongly affected by a court action
  e. Replevin bond: assures the return of property to its rightful owner

Question 15

Public Official Bond

Answer 15

Protects the public from a public official’s lack of performance

Question 16

Customs Bond

Answer 16

Guarantees that an importer/exporter will pay all customs taxes and fees, and obey all regulations and laws

Question 17

Financial Guarantee Bond

Answer 17

Guarantees that principal and interest will be paid per the terms of the contract or promissory note

Question 18

Lost Instrument Bond

Answer 18

Guarantees that an issuer of a replacement for a lost financial instrument will not suffer an economic loss if the owner of the instrument later finds and negotiates the original

Question 19

Reclamation Bond

Answer 19

Guarantees the health, safety, and welfare of the public during and after mining operations, and guarantees land will be restored to original condition

Question 20

Self-Insurance Workers’ Compensation Bond

Answer 20

Pays workers’ comp claims filed by the self-insurer’s employees when the self-insurer itself cannot meet this obligation

Question 21

Faithful Performance of Duty Bond

Answer 21

Guarantees a principal will faithfully perform his duties as prescribed by law or the bylaws of the obligee

Question 22

Fidelity Bond

Answer 22

• Guarantees the principal (employee) will NOT do something
• Written on “Employee Theft and Forgery Policy” form
• Similar to commercial crime insurance

In a Fidelity Bond:

• Principal = the employee
• Obligee = the employer
• Surety = the insurer

Question 23

Coverage Options

Answer 23

Employer buys the bond, and the insurer pays the employer if employee commits certain acts.

Coverage options under Fidelity Bond:

• May be “scheduled” or “blanket” coverage
• “Loss sustained” or “discovery” trigger

Question 24

Covered Acts

Answer 24

Fidelity Bonds cover all dishonest acts committed by a covered employee, including:

• Larceny
• Theft
• Embezzlement
• Forgery
• Misappropriation
• Wrongful abstraction
• Wilful misapplication

Question 25

Policy Period and Limits

Answer 25

Policy Period - Typically from 12:01 a.m. on inception date to 12:01 a.m. on the same day of following year (or until cancelled) Limits - "Single Loss" - all loss caused by the same person resulting from a common series of actions - "Aggregate Limit" - total amount for all losses discovered during policy period

Question 26

Scheduled Coverage

Answer 26

Scheduled Fidelity Bonds - Applicable to only select employees or positions - Employees can be bonded for different amounts - Limit of liability is per name/position scheduled - Premiums based on amount of coverage, number of individuals scheduled and their coverage amounts, business activities of the insured, and deductible amount - Typically used in businesses where employees have greater responsibilities or handle large sums of money

Question 27

Blanket Coverage

Answer 27

Blanket Fidelity Bonds - Cover ALL EMPLOYEES of the named insured unless specifically excluded - New employees are automatically covered - All employees are bonded for same aggregate amount - Limit applies per occurrence - Premium based on amount of coverage requested, total number of ALL employees, insured's business activities, and amount of deductible - Common uses for blanket bonds include businesses with large numbers of employees and organizations with voluntary or honorary positions

Question 28

Employee Retirement Income Security Act (ERISA)

Answer 28

- Regulates employee benefit and pension plans - Requires bonding for anyone acting as a plan fiduciary or otherwise handling money and other property for this type of plan

Question 29

Financial Institution Bonds

Answer 29

Used by: - Banks - Credit unions - Securities dealers - Finance companies - Insurance companies

Question 30

Standard Form 24

Answer 30

Eligible for a Standard Form 24: - National and state commercial banks - Trust companies - American agencies for foreign banks - Title insurance companies that accept deposits or act as trust companies - Federal Reserve banks - Federal home loan banks - Savings banks (by rider) - Savings and loan associations (by rider)

Question 31

Standard Form 14

Answer 31

Eligible for a Standard Form 14: - Stockbrokers of securities listed on stock exchanges - Stock exchanges - Securities investors - Investment bankers and trusts - Mutual funds - Commodity brokers - Stockbrokers operating on a partnership basis

Question 32

Standard Form 15

Answer 32

Eligible for a Standard Form 15: - Finance companies who primarily finance paper for and through dealers and those licensed under the Small Business Administration Act - Small loan companies - Mortgage bankers - Title Insurance companies principally engaged in mortgage business - Holding companies who act as the managers of stocks and securities of others - Real estate investment trusts

Question 33

Standard Form 23

Answer 33

Eligible for a Standard Form 23: - Credit unions - National Credit Union Share Insurance Fund

Question 34

Standard Form 25

Answer 34

Eligible for a Standard Form 25: - All types of insurance companies Includes several insuring agreements: - Fidelity: employees' fraudulent or dishonest acts - On Premises: burglary, robbery, unexplained disappearance, damage, or theft by someone on the premises - In Transit: loss of property in the care of a messenger or transportation company - Forgery or alteration: direct losses caused by forgery or alteration of specified items - Securities: losses from dealing in securities that have been forged, altered, lost, stolen

Question 35

Standard Form 28

Answer 35

Excess Bank Employee Dishonesty bond: | - Used with other bonds to provide excess coverage for employee fidelity

Question 36

Public Employee Bonds

Answer 36

Public Employee Dishonesty Coverage - Covers losses resulting from government employee dishonesty - Coverage Form O = per occurrence - Coverage Form P = per employee