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Glossary of Surety Terms
Administrator
A person or entity legally vested with
the right of administration of an estate.
Applications
A form used to collect information to underwrite a risk.
Attachment
The legal process of taking possession of a defendant's
property when the property is in dispute.
Balance
Sheet
A financial
statement listing assets, liabilities and net worth.
Bank
Depository Bonds
Bonds covering the deposit of public funds.
Bankruptcy
Trustee Bonds
Bonds which provide protection to the beneficiaries of the bankruptcy
action that the bonded trustees, appointed in a bankruptcy proceeding,
will perform their duties and handle the affairs according to the rulings
of the court.
Common types of bankruptcies are:
Chapter 7: calls for the "liquidation"
of a business and allows for the sale of the assets to pay outstanding
debts.
Chapter 11: calls for the "reorganization"
of a business and the debtor remains in possession of the assets after
the filing of a plan for the reorganization.
Bid Bonds
Bonds which provide financial assurance that the bid has been submitted
in good faith, and that a contractor will enter into a contract at the
amount bid and post the appropriate performance bonds. These bonds are
used by owners to pre-qualify contractors submitting proposals on contracts.
Blanket
Bonds
Bonds which protect against dishonesty of all of the employees of
an entity to the stated amount of the bond.
Blanket
Position Bonds
Bonds which protect against dishonesty of each of the employees of
an entity stated on the bond to the stated amount of the bond.
Blanket
Public Official Bonds
Blanket public official bonds cover all public
employees of the public entity stated on the bond to the stated amount
of the bond.
Blanket
Position Public Official Bonds
The blanket position public official bond covers
each public employee of the public entity stated on the bond to the stated
amount of the bond.
Capacity
A term that refers
to the size of a bond which a surety is able to write.
Commercial
Bonds
A general classification of bonds that refers to
all bonds other than contract and performance bonds. Commercial bonds
cover obligations typically required by law or regulation. Each bond is
unique to the circumstances at hand.
Commercial Blanket Bonds
These bonds provide a single amount of coverage
to cover dishonest acts of employees, regardless of the number of employees
involved in the loss. In other words, this type of bond covers all employees
to the amount stated on the bond.
Conservator
A person, official, or entity designated to
take over and protect the interest of an incompetent or minor.
Contract
Bonds
A general classification of bonds that provide financial security and construction
assurance on building and construction projects by assuring the project
owner (obligee) that the contractor (principal) will perform the work and
pay certain subcontractors, laborers, and material suppliers.
Court
and Probate Bonds
Judicial and probate bonds, also referred to as
fiduciary bonds, secure the performance on fiduciaries' duties and compliance
with court order, e.g. administrators, executors, guardians, trustees
of a will, liquidators, receivers, and masters. Judicial proceedings court
bonds include injunction, appeal, indemnity to sheriff, mechanic's lien,
attachment, replevin, and admiralty.
Damages
Refers to monetary measure of harm or injury asserted
by a claim.
Defendant
The term that refers
to the person or entity being accused in a court case.
Defendant
Bonds
Defendant bonds counteract the effect of the bond
that the plaintiff has furnished. They often require the posting of collateral
to be written.
Employee Retirement Income Security
Act
The 1974 federal legislation that created
a requirement for a bond to be posted, in the amount of ten percent of
the funds, on the fiduciary of pension funds and profit-sharing plans.
Errors
and Omissions Insurance
A policy that provides coverage for an insured in the event of
unintentional mistakes. Errors and Omissions Insurance, commonly referred
to as E&O, covers damages arising out of the insured's negligence, mistakes,
or failure to take appropriate action in the performance of business or
professional duties.
Executor
A person or entity appointed to execute
a will.
Fidelity
Bonds
Bonds designed to protect against dishonesty. Generally, the bond
protects against dishonesty of employees. These bonds cover losses arising
from employee dishonesty and indemnify the principal for losses caused
by the dishonest actions of its employees.
Fiduciary
One who is appointed to act in the best interests of another.
A fiduciary is a person or entity appointed by the court to handle the
affairs of persons who are not able to do so themselves. Fiduciaries are
often requested to furnish a bond to protect against a lack of faithful
performance of their duties.
Fiduciary Bonds
Bonds which protect against dishonest accountings and
a lack of faithful performance of duties by administrators, trustees, guardians,
executors, and other fiduciaries. Fiduciary bonds, often referred to as
probate bonds, are required by statutes, courts, or legal documents for
the protection of those on whose behalf a fiduciary acts. They are needed
under a variety of circumstances, including the administration of an estate
and the management of affairs of a trust or a ward.
Funds Control
A method of taking control of a bonded
project's cash flow to ensure subcontractors and suppliers will be paid
appropriately. This method may be used when the contractor would not otherwise
qualify for a bond.
Indemnification
The act of holding another harmless in
the event of a loss.
Individual
Bonds
A term generally used with public official
bonds, which refers to bonds written in the name of the specific public
official.
Large
Deductible Plans
A type of insurance program bond in which the insurer pays all
losses, including those that fall within the deductible, and seeks reimbursement
from the policyholder on a monthly or quarterly basis. The bond protects
the insurer in the event the policyholder does not reimburse the insurer
for losses within the deductible.
License
and Permit Bonds
License and Permit Bonds are required to obtain
a license or permit in many cities, counties, states or other political
subdivisions. They may be required for a number of reasons, including
the payment of certain taxes and fees or providing consumer protection
as a condition to granting licenses related to selling things such as
motor vehicles or contracting services.
Maintenance
Bonds
Maintenance Bonds provide for upkeep of the
project for a specified period of time after a project is completed. These
bonds protect against defective workmanship or materials.
Minor
A person who is not of legal majority.
Miscellaneous Bonds
Miscellaneous Bonds cover performance
of contracts and agreements with private parties and government agencies.
e.g. lost securities, utility deposit, wages and welfare.
Name
Schedule Bonds
A type of public official or fidelity
bond that lists the specific names and amounts of each named individual
bonded. Name schedule bonds use one bond, but attach a schedule of individual
names of the bonded public officials. Each name will list a specific dollar
amount for which that individual is being bonded. These may be used to
bond a panel of city council members or similar body of officials.
Name
Schedule Public Official Bonds
Name schedule bonds use one bond, but attach a
schedule of individual names of public officials being bonded. Each name
will list a specific dollar amount for which that individual is being
bonded. These may be used to bond a panel of city council members or similar
body of officials.
Notary
Public Bonds
Include bonds that are required by statutes to
protect against losses resulting from the improper actions of notaries.
Obligee
The person or entity for whom or which a surety provides protection due
to the lack of performance of the principal's obligations.
Open Penalty
A term used to refer to the unlimited liability
of the surety on a particular bond.
Ordinance
A municipal regulation.
Payment
Bonds
Payment
bonds cover payment of the contractor's obligation under the contract
for subcontractors, laborers, and materials suppliers associated with
the project. Since liens may not be placed on public jobs, the payment
bond may be the only protection for those supplying labor or materials
to a public job.
Penalty
A term used to refer to the monetary size or limit
of bond.
Pension
A fixed sum of money regularly paid to a person.
Performance
Bonds
Performance
Bonds cover performance of the terms of a contract. These bonds frequently
incorporate payment bond (labor and materials) and maintenance bond liability.
This protects the owner from financial loss should the contractor fail
to perform the contract in accordance with its terms and conditions.
Plaintiff
The person or entity that brings an action in a
court of law.
Plaintiff
Bonds
Plaintiff bonds are required of a plaintiff in an action of law. They
generally protect against damages to the defendant caused by the plaintiff's
legal action, should the court decide for the plaintiff.
Position
Schedule Bonds
A type of fidelity or public official bond, which
lists specific positions and their corresponding penalty amounts. Position
schedule bonds use one bond, but attach a schedule of positions to be
bonded. Each name will list a specific dollar amount for which that individual
is being bonded. This type of bond may be used to bond certain positions
that have a high amount of turnover. Using a position instead of a name
will reduce the paperwork involved year-to-year.
Premium
A sum of money paid as consideration
for an insurance policy or bond.
Principal
The individual required to be bonded by the obligee.
Public
Official Bonds
Public Official Bonds protect against dishonesty
and lack of faithful performance by a public official. These bonds are
required by statutes and ordinances.
Public Officials
One who holds public office.
Rates
The amount of money per thousand dollars (or percentage)
used to determine the bond premium.
Reclamation
Bonds
A bond which provides protection in the event that a person or entity does
not restore land, that it has mined or otherwise altered, to its original
condition.
Replevin
A legal proceeding used to recover specific personal
property.
Retrospective
Plan Bonds
Type of insurance program bond in which the final premium is a combination
of incurred losses and an administrative charge. Retrospective plans are
loss sensitive insurance plans. Since final loss costs may take years
to develop, the bond covers payment of the final premium amount.
SBA
An acronym for the Small Business Administration.
The SBA has a program to help small and minority owned contracting businesses
obtain surety bonds.
Self-Insurers
Retention Plan Bonds
A type of insurance program bond
that is commonly used with Workers' Compensation insurance, General Liability
coverage or other liability coverage where limited coverage is available
or coverage, when available, may not be affordable.
Supply
Bonds
Supply Bonds cover performance of a contract to
furnish supplies or materials. In the event of a default by the supplier,
the surety indemnifies the purchaser of the supplies against the resulting
loss.
Surety
A person or entity which covers
the acts of another.
Surety Bonds
Surety bonds are three-party agreements in which the
issuer of the bond (the surety) joins with the second party (the principal)
in providing protection to a third party (the obligee) regarding fulfillment
of an obligation on the part of the principal. An obligee is the party
(person, corporation or government agency) to whom a bond is given. The
obligee is also the party protected by the bond against loss.
Surety Industry
The surety industry is composed of contract
surety business and commercial surety business. The products comprising
each are sold through the same type of distribution system -- agents and
brokers.
Treasury Listing
A financial rating published by the federal government
that lists the maximum size of federal bond a surety is allowed to write.
Trustee
A trustee is a person or entity named to manage
a business' assets and work with the business creditors.
Work-On-Hand
Reports
A type of financial statement or schedule which
lists a contractor's jobs in progress.
Workers'
Compensation Self-Insurers Bond
Workers'
Compensation laws, at the state and federal level, require employers to
compensate employees injured on the job. An employer may comply with these
laws by purchasing insurance or self insuring by posting a workers' compensation
bond to guarantee payment of benefits to employees. This is a hazardous
class of commercial surety bond because of its "long-tail" exposure and
potential cumulative liability. The "long-tail" exposure stems from the
two statutory bond forms:
Traditional - bond form:
The surety is liable for payment of the principal's workers' compensation
obligations occurring during the time the bond is in force. When the
bond is canceled, the surety continues to have liability for all workers'
compensation claims incurred between the effective date of the bond
and the cancellation date of the bond.
Last surety on - bond form:
The surety assumes all past, present and future liability to pay the
principal's self-insurers workers' compensation obligations. The surety
is released from all accrued liability if the surety cancels the bond
and the principal later posts an acceptable replacement security.
This
glossary attempts to illustrate common usage of surety industry terms.
These brief descriptions are not intended as legal interpretations. Consult
an insurance dictionary or an industry professional from CNA Surety for
more complete information.
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