Chapter 27: Surety

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