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Surety Bond
What is a Bond?
A Guarantee
A contract between 3 parties
- Oblige – Bond is written to
- Principal – Bond is written for
- Surety – Bond is written by
Bond Type
ARC
Auctioneer
City, Country Permit
Collection Agency
Defective Title
DMV Records Purchase
Driving School
Employment Agency
Escrow Agent
Farm Labor
Insurance Broker
Legal Document
Lost note Paid
Lost note Un-paid
Mortgage Broker
Motor Vehicle Dealer
Franchise Dealer New
Motor Vehicle Dealer Used
Motor Vehicle Dealer Motorcycle
Nursing Home
Pawn Broker
Pest Control
Process Server
Relocation Permit
Talent Agency
Tax Preparer
Traffic Violators School
Utility Deposits
Waste Hauler
Yacht/Ship Broker
Principal
Is primarily responsible for the fulfillment of the obligation set forth in the bond and must perform come act under certain conditions or respond in money damages.
Obligee
Is the beneficiary under the terms of the bond? If the obligation is not fulfilled, the principal and the surety are liable to the obligee for damages. However, the limit of the surety’s liability to the obligee is the amount of the bond (penalty). An obligee may be a person, firm, corporation, government or an agency of a government.
Surety
Is the party who joins with the principal for the purpose of guaranteeing to the obligee the fulfillment of the principal’s obligation.
Corporatesurety
Is a corporation licensed under various insurance laws, which under its charter, has legal power to act as surety for others.
Personal surety
Is an individual who acts as surety for another, who acts as surely for another, who may or may not charge a fee for his guarantee, and usually is not reguiated by any government agency, such as is the corporate surety.
Suretyship
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Insurance |
Three party agreement
Most surety bonds are three party agreements. The surety guarantees faithful performance or the principal to the obligee.
Losses not expected
Though some losses do occur, surety premiums do not contain largo provisions for loss payment. The surety takes those risks which its underwriting experience indicates are safe. This service is for qualified individuals or businesses whose affairs require a guarantor.
Losses recoverable
A bond resembles a “loan”: the surety is “lending” its credit to the principal. After a claim is paid, the surety expects to recoup its losses from the principal.
Unfortunately, actual experience shows few such recoveries.
Premiums cover expenses
A large portion of the surety bond premium is really a service charge for weeding out unqualified candidates and for issuing the bond.
Sureties are selective
A surety agent is selective. Like a hanker, he is trained not to make any bad loans.
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Two party agreement
Insurance is basically a two party agreement whereby the insurance company agrees to pay the insured directly for the losses incurred.
Losses expected
Losses usually not recovered
When an insurance company pays a claim, it usually doesn’t expect to be repaid by the insured.
Premiums cover losses and expenses
Insurance premiums are collected to pay for expected losses. If an insurance company can get enough average risks of one class, it will always have enough money to pay losses and the expenses of doing business.
Insurers write most risks
The insurance agent generally tires to write a policy on anything that comes along (at the appropriate premium rate) and allows for a large volume to cover the risk. |
Credit nature of suretyship
- Bonds used in only a few selective countries.
- Bank-issued letters of credit as construction guarantees used in most countries.
- Surety Company’s indemnity is very similar to hank’s continuing guarantees.
Glossary of Terms
Application
A questionnaire giving required information concerning one who request a bond written on his behalf, describing the nature of the bond requested, plus the applicant’s promise to pay the bond premium and also to indemnify the surety in the event of default.
Cancellation clause
A clause in a bond which permits the surety to terminate its future liability by serving written notice upon the obligee.
Collateral
Anything of value pledged with the surety to secure it against loss by reason of default of the principal. For designated types of collateral, a lower rate is given on certain bonds.
Indemnity
To compensate for actual direct loss sustained under a bond. There can be no recovery on a bond until the obligee has actually suffered a loss.
Indemnitor
One who enters into an agreement with a surety company to hold the surety harmless from any loss or expense it may sustain or incur on a bond issued on behalf of himself or another.
Statutory bond
A term generally used describing a bond given in compliance with a statue. Such a bond must carry whatever liability the stature imposes on the principal and the surety.
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