Surety Bonds
-A risk transfer mechanism
-Provides monetary compensation if the bonded party fails to perform
A risk transfer mechanism
-Like insurance in that is "risk transfer"
-Used primarily for "contractual" risk transfer
Insurance
-2 parties to a contact
-Expects to pay some losses
-Insurer normally doesn't have the right to recover loss payments from insured
-Insurer for fortuitous losses
Exceptions to insurance
-When insurer sells damaged property for which the insurer has paid them total insured value (TV)
-Must return salvage to insurer
Surety
-3 parties to the contact
-Theoretically, expects they will pay out "O"
-Has legal right to recover payment
-Is providing a guaranty
Surety has legal right to recover payment
Is legally entitled to payment from the bonded party (the "principle") for losses paid by the surety on behalf of the principle
Surety is providing a guaranty
-The bond guarantees the bonded party's honesty, integrity, character and ability to perform
-This is not a "fortuitous" loss
The "loss
Is in the bonded party's control (at least to some extent)
Principle parties to a surety bond
-Agrees to perform certain acts (e.g. a contractor)
-The "bonded party
Obligee parties to a surety bond
-Party to whom the principle is obliged
-Paid if the principle fails to perform (e.g. owner)
Surety/obligor parties to a surety bond
-Pays the obligee if the principle fails to perform
-Agrees to answer for the debt, default, or failure to perform of another (the principle)
Contract bonds
-"Contractor" bonds
-Bid bond
-Performance bond
-Payment bond
-Maintenance bond
Bid bond
Guarantees winner of bid will perform as promised
Performance bond
Owner is guaranteed that work will be completed according to specifications
Payment bond
Guarantees labor and materials used in the building will be paid when bills are due
Maintenance bond
Guarantees poor workmanship will be corrected or defective materials will be replaced
Types of surety bonds
-Contract bonds
-License and permit bonds
-Public official bonds
-Judicial bonds
-Federal surety bonds
License and permit bonds
Guarantees the bonded person will comply with regulations
Public official bonds
Guarantees a public official will fulfill their duties (and not seal or engage in the order dishonest acts)
Judicial bonds
Guarantees bonded person will fulfill legal obligation (e.g. show up to court, "bail bond")
Federal surety bonds
Guarantees compliance with federal standards