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In
finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money available which could ...

finance
, a surety , surety bond or guaranty involves a promise by one party to assume responsibility for the
debt Debt is an obligation that requires one party, the debtor A debtor or debitor is a legal entity (legal person) that owes a debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to ...

debt
obligation of a borrower if that borrower defaults. Usually, a surety bond or surety is a promise by a surety or guarantor to pay one party (the ''obligee'') a certain amount if a second party (the ''principal'') fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal's failure to meet the obligation. The person or company providing the promise is also known as a "surety" or as a "guarantor".


Overview

A surety bond is defined as a
contract A contract is a legally binding agreement that defines and governs the rights and duties between or among its parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder Severin Krøyer (1888) Demisted with DXO PhotoLab Clearview; ...

contract
among at least three parties: * the ''obligee'': the party who is the recipient of an obligation * the ''principal'': the primary party who will perform the contractual obligation * the ''surety'': who assures the obligee that the principal can perform the task European surety bonds can be issued by banks and surety companies. If issued by banks they are called "Bank Guaranties" in English and ''Cautions'' in French, if issued by a surety company they are called surety / bonds. They pay out cash to the limit of guaranty in the event of the default of the Principal to uphold his obligations to the Obligee, without reference by the Obligee to the Principal and against the Obligee's sole verified statement of claim to the bank. Through a surety bond, the surety agrees to uphold—for the benefit of the obligee—the contractual promises (obligations) made by the principal if the principal fails to uphold its promises to the obligee. The contract is formed so as to induce the obligee to contract with the principal, i.e., to demonstrate the credibility of the principal and guarantee performance and completion per the terms of the agreement. The principal will pay a premium (usually annually) in exchange for the bonding company's financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred. In some cases, the principal has a
cause of action A cause of action or right of action, in law, is a set of facts sufficient to justify suing to obtain money, property, or the enforcement of a legal right against another party. The term also refers to the legal theory upon which a plaintiff brin ...
against another party for the principal's loss, and the surety will have a right of
subrogation Subrogation is the assumption by a third party (such as a second creditor or an insurance company) of another party's legal right to collect a debt or damages. It is a legal doctrine whereby one person is entitled to enforce the subsisting or revive ...
"step into the shoes of" the principal and recover damages to make up for the payment to the principal. If the principal defaults and the surety turns out to be
insolventInsolvency is the state of being unable to pay the debts, by a person or company ( debtor), at maturity; those in a state of insolvency are said to be ''insolvent''. There are two forms: cash-flow insolvency and balance-sheet insolvency. Cash-flow i ...
, the purpose of the bond is rendered nugatory. Thus, the surety on a bond is usually an
insurance company Insurance is a means of protection from financial loss. It is a form of risk management, primarily used to Hedge (finance), hedge against the risk of a contingent or uncertain loss. An entity which provides insurance is known as an insurer, ...
whose solvency is verified by private audit, governmental regulation, or both. A key term in nearly every surety bond is the ''penal sum''. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal's default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly. Surety bonds also occur in other situations, for example, to secure the proper performance of
fiduciary A fiduciary is a person who holds a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by ...
duties by persons in positions of private or public trust.


Reason for having a guarantor

A surety most typically requires a guarantor when the ability of the primary obligor, or ''
principal Principal may refer to: Title or rank * Principal (academia) The principal is the chief executive and the chief academic officer of a university A university ( la, universitas, 'a whole') is an educational institution, institution of higher ...
'', to perform its obligations to the obligee (counterparty) under a
contract A contract is a legally binding agreement that defines and governs the rights and duties between or among its parties Image:'Hip, Hip, Hurrah! Artist Festival at Skagen', by Peder Severin Krøyer (1888) Demisted with DXO PhotoLab Clearview; ...

contract
is in question or when there is some public or private interest that requires protection from the consequences of the principal's default or delinquency. In most
common law In law, common law (also known as judicial precedent or judge-made law, or case law) is the body of law created by judges and similar quasi-judicial tribunals by virtue of being stated in written opinions. ''Black's Law Dictionary'' is the most-us ...
jurisdictions, a contract of suretyship is subject to the
Statute of Frauds The statute of frauds is the requirement that certain kinds of contract A contract is a legally binding agreement that defines and governs the rights and duties between or among its parties Image:'Hip, Hip, Hurrah! Artist Festival at Skage ...
(or its equivalent local laws) and is unenforceable unless it is recorded in writing and signed by the surety and by the principal.


United States industry

The SFAA published US and Canadian H1 surety results on September 5, 2019. Direct written premium totaled $3.5 billion and a direct loss ratio of 18.2%, highlighting strong profitability in the surety industry. The industry remains highly fragmented with over 100 companies directly writing surety bonds with new market entrants entering or reentering on a fairly common basis. annual US surety bond premiums amounted to approximately $3.5 billion. State
insurance commissionerAn insurance commissioner (or commissioner of insurance) is a public official in the executive branch The executive is the branch of government exercising authority in and holding Moral responsibility, responsibility for the governance of a Sta ...
s are responsible for regulating corporate surety activities within their jurisdictions. The commissioners also license and regulate brokers or agents who sell the bonds. These are known as producers; the National Association of Surety Bond Producers (NASBP) is a trade association which represents this group. In 2008, the New York Times wrote "posting
bail Bail is a set of pre-trial In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its ...
for people accused of crimes in exchange for a fee, is all but unknown in the rest of the world".


Miller Act

The
Miller Act The Miller Act (ch. 642, Sec. 1-3, 49 stat. The ''United States Statutes at Large'', commonly referred to as the ''Statutes at Large'' and abbreviated Stat., are an official record of Act of Congress, Acts of Congress and concurrent resolutions ...
may require a
surety bond In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investments. Savers and investors have money availabl ...
for contractors on certain federal construction projects; in addition, many states have adopted their own "Little Miller Acts". The surety transaction will typically involve a producer; the
National Association of Surety Bond Producers National may refer to: Common uses * Nation A nation is a community of people formed on the basis of a common language, history, ethnicity, or a common culture, and, in many cases, a shared territory. A nation is more overtly political than an ...
(NASBP) is a
trade association A trade association, also known as an industry trade group, business association, sector association or industry body, is an organization founded and funded by businesses that operate in a specific . An industry trade association participates in ...
that represents such producers.


Right of subrogation

If the surety is required to pay or perform due to the principal's failure to do so, the law will usually give the surety a right of
subrogation Subrogation is the assumption by a third party (such as a second creditor or an insurance company) of another party's legal right to collect a debt or damages. It is a legal doctrine whereby one person is entitled to enforce the subsisting or revive ...
, allowing the surety to "step into the shoes of" the principal and use the surety's contractual rights to recover the cost of making payment or performing on the principal's behalf, even in the absence of an express agreement to that effect between the surety and the principal.


Distinction between a suretyship arrangement and a guaranty

Traditionally, a distinction was made between a suretyship arrangement and that of a guaranty. In both cases, the lender gained the ability to collect from another person in the event of a default by the principal. However, the surety's liability was joint and primary with the principal: the creditor could attempt to collect the debt from either party independently of the other. The guarantor's liability was ancillary and derivative: the creditor first had to attempt to collect the debt from the debtor before looking to the guarantor for payment. Many jurisdictions have abolished that distinction, in effect putting all guarantors in the position of the surety.


Contract surety bonds

Contract bonds, used heavily in the
construction Construction is a general term meaning the and to form , , or ,"Construction" def. 1.a. 1.b. and 1.c. ''Oxford English Dictionary'' Second Edition on CD-ROM (v. 4.0) Oxford University Press 2009 and comes from ''constructio'' (from ''com-' ...

construction
industry by
general contractor A general contractor, main contractor or prime contractor is responsible for the day-to-day oversight of a construction Construction is a general term meaning the art and science to form Physical object, objects, systems, or organizations,"C ...
s as a part of
construction lawConstruction law is a branch of law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its enviro ...
, are a guaranty from a surety to a project's owner (obligee) that a general contractor (principal) will adhere to the provisions of a contract. The
Associated General Contractors of AmericaThe Associated General Contractors of America (AGC) is a trade association A trade association, also known as an industry trade group, business association, sector association or industry body, is an organization founded and funded by businesses t ...
, a United States trade association, provides some information for their members on these bonds. Contract bonds are not the same thing as contractor's license bonds, which may be required as part of a license. Included in this category are
bid bondA bid bond is issued as part of a Construction bidding , supply bidding process by the General contractor, contractor to the project owner, to provide guarantee, that the winning bidder will undertake the contract under the terms at which they bid. ...
s (guaranty that a contractor will enter into a contract if awarded the bid);
performance bond A performance bond, also known as a contract bond, is a surety bond In finance, a surety , surety bond or guaranty involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. Usually, a ...
s (guaranty that a contractor will perform the work as specified by the contract);
payment bond A payment bond is a surety bond In finance, a surety , surety bond or guaranty involves a promise by one party to assume responsibility for the debt obligation of a borrower if that borrower defaults. Usually, a surety bond or surety is a promise ...
s (guaranty that a contractor will pay for services, particularly
subcontractor A subcontractor is an individual or (in many cases) a business that signs a contract to perform part or all of the obligations of another's contract. A subcontractor (or sub-contractor) is a company or person whom a general contractor, prime con ...
s and materials and particularly for federal projects where a
mechanic's lien A mechanic's lien is a security interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investment ...
is not available); and maintenance bonds (guaranty that a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are
subdivision Subdivision may refer to: Arts and entertainment * Subdivision (metre), in music * Subdivision (film), ''Subdivision'' (film), 2009 * "Subdivision", an episode of Prison Break (season 2), ''Prison Break'' (season 2) * Subdivisions (EP), ''Subdivisi ...
and supply bonds. Bonds are typically required for federal government projects by the
Miller Act The Miller Act (ch. 642, Sec. 1-3, 49 stat. The ''United States Statutes at Large'', commonly referred to as the ''Statutes at Large'' and abbreviated Stat., are an official record of Act of Congress, Acts of Congress and concurrent resolutions ...
and state projects under "little Miller Acts".Dan Donohue and George Thomas. (1996)
Construction Surety Bonds In Plain English
In federal government, the contract language is determined by the government. In private contracts the parties may freely contract the language and requirements.
Standard form contract A standard form contract (sometimes referred to as a ''contract of adhesion,'' a ''leonine contract'', a ''take-it-or-leave-it contract'', or a '' boilerplate contract'') is a contract A contract is a legally binding agreement that defines an ...
s provided by the American Institute of Architects (AIA) and the Associated General Contractors of America (AGC) make bonding optional. If the parties agree to require bonding, additional forms such as the performance bond contract AIA Document 311 provide common terms. Losses arise when contractors do not complete their contracts, which often arises when the contractor goes out of business. Contractors often go out of business; for example, a study by BizMiner found that of 853,372 contracts in the United States in 2002, 28.5% had exited business by 2004. The average failure rate of contractors in the United States from 1989 to 2002 was 14% versus 12% for other industries. Prices are as a percentage of the penal sum (the maximum that the surety is liable for) ranging from around 1% to 5%, with the most credit-worthy contracts paying the least.Donohue D., Thomas G. (1996)
"How Surety Bonds Work"
Archived a

The bond typically includes an indemnity agreement whereby the principal contractor or others agree to indemnify the surety if there is a loss. In the United States, the
Small Business Administration The U.S. Small Business Administration (SBA) is a United States government The federal government of the United States (U.S. federal government) is the national government of the United States The United States of America (USA), ...
may guaranty surety bonds; in 2013 the eligible contract tripled to $6.5 million.


Commercial surety bonds

Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.


License and permit bonds

License and permit bonds are required by certain federal, state, or municipal governments as prerequisites to receiving a
license A license (American English American English (AmE, AE, AmEng, USEng, en-US), sometimes called United States English or U.S. English, is the set of varieties of the English language native to the United States. Currently, American English ...

license
or permit to engage in certain business activities. These bonds function as a guaranty from a Surety to a government and its constituents (obligee) that a company (principal) will comply with an underlying
statute A statute is a formal written enactment of a legislative A legislature is an assembly Assembly may refer to: Organisations and meetings * Deliberative assembly A deliberative assembly is a gathering of members (of any kind of collective) ...

statute
,
state lawState law refers to the law of a federated state A federated state (which may also be referred to as a state, a province, a region, a canton, a (bundes)land, a governorate, an oblast, an emirate or a country) is a territorial and constitution ...
, municipal ordinance, or
regulation Regulation is the management of complex systems A complex system is a system composed of many components which may interaction, interact with each other. Examples of complex systems are Earth's global climate, organisms, the human brain, infras ...

regulation
. Specific examples include: * Contractor's license bonds, which assure that a contractor (such as a plumber, electrician, or general contractor) complies with laws relating to his field. In the United States, bonding requirements may be at federal, state, or local level. * Customs bonds, including importer entry bonds, which assure compliance with all relevant laws, as well as payment of import
duties A duty (from "due" meaning "that which is owing"; fro, deu, did, past participle of ''devoir''; la, debere, debitum, whence "debt Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to anot ...
and
tax A tax is a compulsory financial charge or some other type of levy imposed on a taxpayer (an individual or legal entity In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act accord ...
es. * Tax bonds, which assure that a business owner will comply with laws relating to the remittance of
sales Sales are activities related to selling or the number of goods sold in a given targeted time period. The delivery of a service for a cost is also considered a sale. The seller, or the provider of the goods or services, completes a sale in r ...
or other taxes. * Reclamation and environmental protection bonds * Broker's bonds, including insurance, mortgage, and title agency bonds *
ERISA The Employee Retirement Income Security Act of 1974 (ERISA) (, codified in part at ) is a federal law, federal United States tax law, United States tax and United States labor law, labor law that establishes minimum standards for Retirement plans ...
(Employee Retirement Income Security Act) bonds * Motor vehicle dealer bonds *
Freight broker bond A freight broker bond is something freight brokers and freight forwarders in the United States must obtain in order to get or renew their license. In the United States, freight broker surety bonds are required by the Federal Motor Carrier Safety A ...
s *
Money transmitterIn the legal code of the United States, a money transmitter or money transfer service is a business entity that provides money transfer services or payment instruments. Money transmitters in the US are part of a larger group of entities called money ...
bonds * Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.


Court bonds

Court bonds are those bonds prescribed by statute and relate to the courts. They are further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies.
Fiduciary A fiduciary is a person who holds a legal Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by ...
, or
probate Probate is the judicial process whereby a will is "proved" in a court of law and accepted as a valid public document that is the true last testament of the deceased, or whereby the estate is settled according to the laws of intestacy Intest ...
, bonds are filed in
probate court A probate court (sometimes called a surrogate court) is a court A court is any person or institution, often as a government institution, with the authority to Adjudication, adjudicate legal disputes between Party (law), parties and carry out ...
s and courts that exercise equitable jurisdiction; they guaranty that persons whom such courts have entrusted with the care of others' property will perform their specified duties faithfully. Examples of judicial bonds include
appeal In law Law is a system A system is a group of Interaction, interacting or interrelated elements that act according to a set of rules to form a unified whole. A system, surrounded and influenced by its environment, is described ...
bonds, supersedeas bonds, attachment bonds,
replevin Replevin () or claim and delivery (sometimes called revendication) is a legal remedy A legal remedy, also referred to as judicial relief or a judicial remedy, is the means with which a court of law, usually in the exercise of Civil law (common law ...
bonds,
injunction An injunction is a legal Law is a system of rules created and law enforcement, enforced through social or governmental institutions to regulate behavior,Robertson, ''Crimes against humanity'', 90. with its precise definition a matter of l ...
bonds,
mechanic's lien A mechanic's lien is a security interest In finance Finance is the study of financial institutions, financial markets and how they operate within the financial system. It is concerned with the creation and management of money and investment ...
bonds, and
bail bond Bail is a set of pre-trial restrictions that are imposed on a suspect to ensure that they will not hamper the judicial process. Bail is the conditional release of a defendant A defendant is a person A person (plural people or persons) is ...
s. Examples of fiduciary bonds include
administrator Administrator or admin may refer to: Job roles Computing and internet * Database administrator, a person who is responsible for the environmental aspects of a database * Forum administrator, one who oversees discussions on an Internet forum * ...
,
guardian Guardian or The Guardian may refer to: *Legal guardian A legal guardian is a person who has been appointed by a court or otherwise has the legal authority (and the corresponding duty) to care for the personal and property Property (''latin: R ...
, and
trustee Trustee (or the holding of a trusteeship) is a legal term {{Short pages monitor * {{Authority control Sureties
Legal terminology {{CatAutoTOC Terms Jargon Terminology Terms Terminology Terminology is a general word for the group of specialized words or meanings relating to a particular field, and also the study of such terms and their use. This is also known as termino ...