Glossary of Bond Terminology
A
accounting methods
For construction or building contractors, the two methods of accounting, both realistic and preferred by surety companies, are (a) the completed contract method, and (b) the percentage-of-completion method.
administrator
A fiduciary appointed by the probate court, in the absence of a will, to manage or distribute the assets of an estate and pay all just claims and debts.
admitted company
An insurance or surety company licensed to do business in a given state.
alcohol bond
A general term describing a bond given in compliance with either federal or state laws or regulations governing the sale, manufacture or warehousing of alcohol. The bond frequently is referred to as a liquor bond where the alcohol is intended for beverage purposes.
appeal bond
One filed in court by a defendant, against whom a judgment has been rendered, in order to stay execution of the judgment pending appeal to a higher court, in the hope of reversing the judgment.
application
A questionnaire giving required information concerning one who requests a bond written in 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.
assets
The assets of a surety or insurance company including all funds, property, securities, etc. Also, the property of an estate, whether real or personal.
attachment
Taking legal possession of a defendant's property when the property is in dispute.
attorney-in-fact
One who holds a power of attorney granted by a surety company empowering the execution of a surety bond. (See "power of attorney")
B
bail bond
One given by an individual accused or convicted of violation of a law or ordinance in order to secure his release or liberty, guaranteeing that he will appear in court at the time set for trial.
bank depository bonds
Bonds that guarantee the deposit of public funds.
bankruptcy trustee bonds
Bonds that assure a bankruptcy action's beneficiaries that the bonded (court-appointed) trustees will perform their duties according to the rulings of the court.
bid bond
A guarantee that a contractor will enter into a contract, if awarded to him, and furnish such contract bonds as are required by the terms of the contract.
blanket bonds
(Financial institutions). Those issued to bankers, brokers, savings and loan associations and others engaged in the financial field. These are broad contracts covering losses of property caused not only by dishonest employees but also burglary, hold-up, damage, destruction, and other well-defined causes.
blanket fidelity bonds
These cover the loss of money, merchandise or (real or personal) property, that an employer either owns, has a financial interest in, or possesses, when such loss is due to employee dishonesty.
blanket position bonds
Bonds which guarantee the honesty of each of the employees of the operation described on the bond, for the amount appearing on the bond.
blanket public official bonds
Such bonds cover a described public operation's employees for the amount stated on 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.
blue sky bonds
Many states have blue sky laws that prohibit the sale of worthless securities. In conjunction with such laws, securities dealers are required to furnish a blue sky bond. It indemnifies a dealer's customers against loss caused by securities sales that were based on false representations.
bond
An instrument designed chiefly to guarantee the integrity and honesty of the principal, his ability, financial responsibility, and his compliance with law or contract; a guarantee of performance. It is an agreement whereby one party, called the surety, obligates itself to a second party, called the obligee, to answer for the default of a third party, called the principal.
burglary
The taking of property from inside the premises by a person unlawfully entering or leaving from the premises as evidenced by marks of forcible entry or exit.
C
capacity
Refers to the maximum bond amount which a surety is able to write.
collateral
Anything of value pledged with the surety to secure it against loss through default of the principal who supplies the collateral.
collusive loss
A loss through embezzlement or defalcation shared in by more than one dishonest employee, acting in consort.
Combination Crime Plan
This is a commercial crime program using a combination of ten coverage forms available under the simplified commercial crime insurance policy. It replaces the comprehensive dishonesty, disappearance and destruction policy and blanket crime insurance.
computer fraud
Theft of property following and directly related to the use of any computer to fraudulently cause a transfer of that property from inside the premises or banking premises to a person (other than a messenger) outside those premises or to a place outside those premises.
construction contract bond
One that guarantees the faithful performance of a contract bond. It is a three-party agreement between the contractor as principal, the owner as obligee, and the surety.
contract
An agreement between two or more parties to do or not to do a certain thing.
contract bond
One that guarantees the performance of a contract.
contract price
The entire sum of money that passes from owner to contractor when final settlement is made between the two under the contract entered into between them.
contractor defaults
Failures on the part of contractors resulting from any one or more of multiple causes which effect breach of the contract.
corporate surety
A surety which is a corporation, licensed under various insurance laws, and which under its charter has legal power to act as surety for others.
cosurety
One of a group of sureties directly participating in a bond, with the obligation under the bond joint and several.
cosuretyship
A procedure whereby two or more surety companies jointly become sureties on a bond.
court bonds
Court Bonds are required in many court proceedings to ensure that one is protected from possible loss as a result of the outcome of the proceeding. There are two types of court bonds: Judicial and Probate.
cumulative liability
When one bond is canceled and another is issued to take its place, and the first bond has a "discovery period," the surety company is exposed to the possibility of a loss equal to the aggregate sum of the two bonds.
custodian
The insured, any partners or an employee while having care and custody of property inside the premises, excluding any person while acting as a watchperson or janitor.
customs bonds
This type of surety bond guarantees that an importer will follow all of the rules and regulations governing the importation of merchandise into the United States. It is given from the surety company to the U.S. government. It also guarantees that all custom duties and custom penalties will be properly paid to the government.
D
defalcation
A term for employee dishonesty usually associated with personnel of financial institutions.
defendants bonds
Bonds given by defendants in litigation enabling them to retain or regain possession of property, pending the outcome of a suit, or to suspend the execution of a judgment, order or decree of a court while the defendant seeks reversal of an unfavorable judgment in a higher court.
depository liability
The liability of a public official as an insurer of public funds which is deposited in a bank and cannot be paid over because of failure or insolvency of the bank.
discovery period
Provision is made in certain bonds and policies to give the insured a period of time after the cancellation of the bond or policy in which to discover that a loss has been sustained coming within the terms of the contract, and which would have been recoverable had the contract continued in force.
dishonesty insurance
A generic term describing fidelity bond coverage guaranteeing against loss caused by dishonest officers or employees of a commercial firm or financial institution, or by dishonest public officials or employees.
E
earned premium
The earned premium on a bond, which is payable in advance, is at any time the amount which would compensate the surety for the protection furnished for the expired portion of the term of the bond.
Employee Retirement Income Security Act
This Act requires a bond to be posted, in the amount of ten percent of the funds, on the fiduciary of pension funds and profit-sharing plans.
embezzlement
A term for employee dishonesty usually associated with personnel of mercantile firms, or public officials and employees.
excess insurance
A bond or policy covering the insured against certain hazards, applying only to loss or damage in excess of a stated amount, or primary insurance.
exclusions
Provisions of a bond or policy referring to hazards or to property with respect to which no insurance is afforded, e.g., nuclear fission or fusion under financial institution bonds.
executor
A fiduciary named in a will to manage or distribute the assets of an estate and pay all just claims and debts. (see "administrator")
experience
The loss record of an insured or of a class of coverage.
extortion
The surrender of property away from the premises as a result of a threat communicated to the insured or an employee, or to a relative or invitee of either, who is, or allegedly is, being held captive.
F
facultative reinsurance
Reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the faculty or privilege to accept or reject each risk offered.
farm labor bond
A kind of surety bond required by state and federal government, this bond guarantees the due amount to farm laborers including damages.
federal bonds
Immigrants bonds, internal revenue bonds and customs bonds. Loosely grouped under the license and permit classification.
federal official bonds
Bonds under which the surety guarantees that the principal, or federal official, will faithfully perform official duties and will account for all funds entrusted to his care.
fidelity bond
A bond which will reimburse an employer for loss, up to the amount or penalty of the bond, sustained by the employer named in the bond by reason of any dishonest act of an employee covered by the bond.
fiduciary
A person who occupies a position of special trust and confidence, particularly one who handles the affairs or funds of another.
fiduciary bonds
Bonds issued for persons either named in a will or appointed by the court to manage the affairs of others, such as wards, incompetents, etc., or to distribute a decedent's estate assets in accordance with the provisions of a will or order of the court.
financial institution bonds
Coverages written on standard forms, identified by form numbers, making coverage available to various classes of financial institutions with respect to employee dishonesty, burglary, hold-up, messenger robbery, and other named hazards.
financial statement
A balance sheet which the surety requires the applicant for a bond (particularly a contractor) to furnish, setting forth the financial position as of a given time or period.
fixed penalty bond
A bond the amount of which is expressed in a certain sum of money.
forgery
Generally, any false writing with intent to defraud.
forgery bond
A contract of insurance, or bond, wherein the insurance company or surety agrees to indemnify the insured for loss sustained by reason of forgery on stated instruments, documents or securities.
funds control
Refers to overseeing a weaker contractor's bonded project's cash flow to make sure that subcontractors and suppliers are properly compensated.
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H
hazard
This is a term applied to certain conditions which may create or increase the probability of a loss, because of a given covered peril.
hold-over public officials
Those who are elected or appointed to succeed themselves in office or who continue in office beyond the limits of their terms until their successors are appointed or elected.
honesty insurance
A generic term meaning fidelity insurance guaranteeing against loss caused by the dishonesty of officers or employees of mercantile firms or financial institutions, or public officials and/or their subordinates.
I
immigrants bonds
An important class of federal bond covering immigrants who enter the united states for temporary reasons, such as study, or for permanent reasons, i.e., to become United States citizens. Such bonds are issued on appropriate government forms, with a number and descriptive title.
income tax bonds
These are given to guarantee payment of federal income taxes due or claimed to be due. They are direct financial guarantees and collateral usually is required.
indemnify
To compensate for actual loss sustained.
individual bonds
(see public official bonds)
insurance
A contractual relationship which exists when one party, for a consideration, agrees to reimburse another party for a loss caused by certain designated contingencies.
insuring agreements
That part of an insurance policy or bond which recites the agreement of the insurer to protect the insured against some form of loss or damage. This is the crux of the insurance contract.
Internal Revenue bonds
An important class of federal bonds, guaranteeing compliance of producers of distilled spirits, tobacco, etc., with laws and regulations, as well as the payment of taxes.
Interstate Commerce Commission (ICC) Bond
This is a financial guarantee bond issued by the interstate commerce commission to protect the public against default. It must meet the requirements of the state and federal governments.
J
joint control
An agreement by written agreement between a fiduciary and a surety, and acknowledged by the bank in which funds are deposited and securities lodged for safekeeping, whereby both parties jointly supervise both funds and securities, and their withdrawal, entailing signature and countersignature.
joint venture
A pooling of financial resources and skills of several contractors in order to undertake contracts of construction which are too large for their individual and separate abilities, thereby cutting down the overall expense.
judicial bonds
A general term applied to all bonds filed in courtÑwhether fiduciary or court bonds. (see "fiduciary" and also "court bonds" for amplification)
judicial court bond
Court bond issued for Plaintiffs, Replevin, Attachment, Costs on Appeal, and Indemnity to Sheriff. See Court Bonds.
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L
labor and material payment bond
A bond given by a contractor guaranteeing payment for the labor and material used in the work which the contractor is obligated to perform under the terms of the contract.
labor union bonds
Bonds required under the U.S. Labor management reporting and disclosure act of 1959, which contains a provision requiring every officer, agent, shop steward, or other labor organization representative to be bonded for the faithful discharge of duties, including the dishonesty hazard. Three separate labor organization bonds have been standardized by the Surety Association of America as a consequence of the passage of that act. (See also "welfare and pension plans.)
large deductible plans
An insurance program bond where the insurer pays all losses, and then is reimbursed by the policyholder on a monthly or quarterly basis. The bond guarantees the policyholder will reimburse the insurer for losses within the deductible.
lender bond
Considered the same as a mortgage lender bond, this bond is required by state law. It guarantees that a lender or broker will abide by the laws, rules, and regulations obligatory under the mortgage broker license code.
liability
This is a broad term denoting any legally enforceable obligation.
license and permit bonds
These are bonds required by state law, municipal ordinance, or local regulation as a condition precedent to the granting of a license to engage in a particular business or the granting of a permit to exercise a specific privilege. Certain serious obligations are entailed on those who seek such licenses or permits, and are thereupon bonded.
limit of liability
The maximum amount which an insurance or surety company agrees to pay in case of loss. Also, in a corporate suretyship, termed the "bond penalty."
liquor bond
(See "alcohol bond")
long-term bond
(fiduciary) A bond required of a fiduciary whose duties are normally expected to extend over a considerable period of time. (See also "short-term bond")
loss ratio
The percentage which incurred losses bear to premiums.
lost securities bonds
Those given by the owners of valuable instruments, such as stocks, bonds, promissory notes, certified checks, etc., which are alleged to have been lost or destroyed, in order to protect the insurers against loss which may result from the issuance of duplicates of the instruments or, in some instances, payment of cash value thereof.
M
maintenance bond
A guarantee against loss because of defective workmanship or materials used in the performance of the construction or supply contract.
manual
A book published by an insurance or bonding organization giving information as to rates, classifications, codes and other data (specifically, for fidelity, forgery and surety bonds, the rate manual of the Surety Association of America).
manual rate
The cost of a unit of insurance or bond protection as published in the pertinent manuals of various organizations in the insurance industry.
messenger
The insured, any partner or any employee while having care and custody of the property outside the premises.
Miller Act Bond
A performance and labor and material payment bond required by the Miller Act on federal work, as approved august 24, 1935 (for further reference: U. S. Code, title 40, section 270a).
miscellaneous contract bonds
A number of contracts, other than construction contracts, require surety bonds, such as supply contract bonds, garbage and ash removal, for carrying United States mail, and for demolition and wrecking contracts.
miscellaneous indemnity bonds
Bonds which do not fit any of the well-recognized divisions or subdivisions, and therefore are thus categorized. The bond manual will supply further data.
money
Currency, coins and bank notes in current use and having a face value; and travelers checks, register checks and money orders held for sale to the public.
mortgage broker bond
Surety bond that must be obtained before a mortgage broker can get a license. It protects the consumer from wrongful acts made by the mortgage broker.
motor vehicle dealer bonds
These bonds protect consumers from wrongful acts of motor vehicle dealers. They are also called MVD bond, auto dealer bond, motor vehicle bond, RV dealer bond, used car dealer bond and motorcycle dealer bond.
moral hazard
The possibility of loss caused or accentuated by dishonesty or carelessness of the insured or others. Actually, both words in the definable sequence answer the problem.
N
name schedule bonds
A bond that lists the names and amounts of each individual bonded, typically on a separate schedule. Such bonds are often used for a body of public officials (a board or council).
notary public bonds
These are required by law to protect against losses resulting from the improper actions of notaries.
notary surety bonds
This surety bond ensures that the State will be reimbursed if a notary fails to properly perform his/her duties.
O
obligee
The party in whose favor the bond runs, or one who is protected against loss by the bond.
obligor
Commonly termed the principal, or one bound by an obligation. Strictly speaking, under a surety bond, both principal and surety are obligors, since the surety must answer if the principal defaults.
open penalty bond
A surety bond without maximum limit on the liability of the principal or the surety.
ordinance
A local government (city or town) regulation.
P
paralegal bond
(In this surety bond, the principal is guaranteed to follow the rules and regulations of both the municipality and state government.
patient trust bond
A surety bond that ensures that a medical facility will not mismanage patients' funds held within the trust. They are required of entities that provide healthcare to their patients at home or within the facility itself. Also known as Medicaid Surety Bonds or Medicare Bonds.
payment bond
Also called a "labor and materials bond," this surety bond guarantees that all bills owed by a service provider will be paid on time. It may also include a performance bond.
performance bond
One that guarantees faithful performance of the terms of a contract for construction or for furnishing of supplies.
personal surety
An individual who acts as surety for another, who may or may not exact a price for services, and usually is not regulated by any governmental agency, such as is the corporate surety.
pest control bond
A surety bond for people in the pest control business. This bonds ensures that pest control operators comply with the guidelines outlined in their license and will reimburse anyone who charges them with fraud or failure to provide the agreed-to service.
plaintiff bonds
A court-required bond that guarantees damages to the defendant caused by the plaintiff's lawsuit if the court decides for the plaintiff.
plaintiffs bonds
Bonds given by plaintiffs in litigation enabling them to exercise certain privileges with permission of the court, such as attachment, injunction, and replevin.
position schedule bonds
A type of fidelity or public official bond that includes a schedule of positions and their corresponding penalty amounts. The use of positions is more practical than using the names of persons who temporarily hold them.
policy
A written contract of insurance, and sometimes of suretyship.
power of attorney
Authority given one person or corporation to act for and obligate another, to the extent laid down in the instrument creating the power. In corporate suretyship, an instrument under seal which appoints an attorney in fact to act in behalf of a surety company in signing bonds.
principal
In suretyship the party whose actions, honesty or responsibility is to be guaranteed. The principal in a fidelity bond, for example, is the bonded employee.
probate bond
A surety bond that ensures that a fiduciary properly distributes property to the right person as per the will of the deceased.
probate court bond
Court bond issued for administrators, executors. See court bonds.
public official bonds
These are afforded in four categories: individual, name schedule, position schedule, and public employees blanket bond and public school system employees blanket bond.
Q
qualifying power
The largest net amount of risk which may be carried by a surety company on a bond. (See treasury limits.)
R
rate
The cost of a unit of insurance.
rate manual
A compendium that lists, among other items, the rates established for individual risks, e.g., the rate manual of fidelity, forgery and surety bonds of the Surety Association of America.
reclamation bond
A bond which guarantees that a person or entity will restore mined (or altered) land to its original state.
refunding bonds
Refers to the practice of issuing more bonds to pay off old bonds that have just matured.
reinsurance
The practice of insurance companies of protecting themselves against excessive loss, usually accomplished by reinsuring with other companies that portion of the assumed liability that exceeds their net line.
reinsured
A company which originates insurance bond and passes along a portion of its liability to other sureties or reinsurers.
reinsurer
Each company accepting from the originating company a portion of its liability, expecting compensation in the form of premium participation.
replevin
A legal proceeding for recovering specific personal property.
retroactive restoration
A provision in a policy or bond whereby, after payment of a loss, the original amount of coverage is automatically restored to take care of prior undiscovered losses as well as future losses.
riders
Another name for clauses or endorsements; more specifically, the printed forms of special provisions not contained in the bond or policy contract. In bonding, such clauses are called riders instead of endorsements.
risk
Any chance of loss. Also, the insured or the property to which the bond or insurance policy relates.
robbery
The taking of property from the care and custody of a person by one who has: (a) caused or threatened bodily harm to that person; or (b) committed an obviously unlawful act witnessed by that person.
S
safe burglary
The taking of covered property from within a locked safe or vault inside the premises, with visible marks of forcible entry on the exterior of the safe.
sales tax bond
A sales tax bond promises that the merchant will pay sales tax to the obligee (e.g., state government) from the purchase of their goods or services. Failure to pay collected funds to the obligee or incorrect reporting can result in a bond claim.
salvage
The value of property after it has been partially damaged by fire, malicious mischief or other perils. In suretyship, salvage is that which is recovered from the principal or an indemnitor to offset in whole or in part the loss and expense paid by a surety in satisfying its obligations under a bond.
SBA
Stands for the Small Business Administration which sponsors a program to help small and minority contractors secure surety bonds.
securities
Negotiable and non-negotiable instruments or contracts representing either money or other property and includes: tokens, tickets, revenue and other stamps (whether represented by actual stamps or unused value in a meter) in current use; and evidences of debt issued in connection with credit or charge cards, which cards are not issued by the insured.
self-insurers retention plan bonds
A type of insurance program bond that is commonly used as an alternative when liability or Workers Compensation coverage is either prohibitive or unavailable.
short-term bonds
Those covering fiduciaries whose duties are to collect the assets of the decedent, pay the debts and distribute the remainder according to law. The terms of these fiduciaries are usually brief (see "long-term bond").
statutory bond
A term generally used describing a bond given in compliance with a statute. Such a bond must carry whatever liability the statute imposes on the principal and the surety.
subcontract bond
One furnished by a subcontractor, and required by general contractors, guaranteeing that the subcontractor will faithfully perform the subcontract in accordance with its terms and will pay bills for labor and material incurred in performing the subcontracted work.
subdivision bond
A surety bond that guarantees that public improvements related to commercial and residential developments will be completed properly and that all financial obligations will be met. These bonds are imposed by the state and federal governments.
subrogation
The legal process by which an insurance company seeks from a third party who may have caused the loss, recovery of the amount paid to the policyholder or, in suretyship, to the obligee.
superseded suretyship rider
When a company writes a bond that takes the place of another that has been canceled as of the effective date of the new bond, a rider is normally attached agreeing to pay losses that would be recoverable under the prior bond except for the fact that the "discovery period" has expired. Losses caused by dishonest employees frequently have occurred at varying times over a period of years which may involve a succession of bonds, each one superseding a prior obligation.
supply bond
One that guarantees faithful performance of a contract for furnishing supplies or materials, etc.
surety
A person or corporation collaterally bound for the payment of money or the performance of an act or duty by another.
Surety & Fidelity Association Of America
An association composed of leading insurance companies that provide fidelity, surety and forgery bon underwriting. It establishes classifications of risk, manual rates, minimum premiums and rating plans; creates standard forms, provisions, riders and other forms. It also collects and analyzes statistical data; makes filings with regulatory authorities on behalf of its members and subscribers, and performs other functions on behalf of its members and subscribers and of their insureds.
surety bonds for outer continental shelf leases
Surety bonds obtained by companies that lease sites so they can drill on the outer continental shelf.
suretyship
The function of being a surety. Stated in its simplest terms, suretyship embraces all forms of obligations to pay the debt or answer for the default of another.
T
TABC Bond
Surety bonds required the Federal Government to ensure the principal abides by the governing rules and regulations. The Texas Alcohol and Beverage Commission Bond guarantees that the principal follows the government regulations concerning the sale, production and warehousing of alcohol for both beverage and non-beverage purposes.
talent agency bond
A bond issued to talent agencies that protects the consumer against fraud and misrepresentation. Also called a talent agent bond.
tax collector bond
This surety bond ensures the performance of a tax collector. It guarantees that the collector will properly perform his duties in the areas of billing, receipt and deposit of funds, record management, and receipt reconciliation.
temporary administrator bond
When a court appoints a temporary administrator for a given task, this bond ensures that person's faithful performance of his or her duties.
term
A period of time for which a bond or policy is issued.
theft
Any act of stealing.
Three Cs
The critical and traditional underwriting considerations made by all surety underwriters: Character, Capacity and Capital.
tobacco license bond
This bond must be obtained before a seller can sell tobacco products in the market.
tobacco tax bond
Also called a cigarette tax bond, it guarantees that the seller pays taxes on the sale of tobacco to the government.
travel agents bond
A travel agent must obtain a license from local authorities. This bond guarantees financial reimbursement to customers for fraud or travel-related problems.
treasury limits
These are qualifying limits imposed upon the surety by the United States treasury department. To be an acceptable surety on bonds in favor of the United States, the surety must qualify financially under regulations of the treasury department. That department annually issues a list of companies so qualified, the underwriting limit of each, the states in which each is licensed, and other data. The underwriting limit is frequently referred to as the "qualifying power," which is equal to 10% of the capital and surplus of the surety.
treaty
Generally a reinsurance contract between companies.
trustee
A trustee is an entity appointed to manage a business' assets and work with the business creditors.
U
underwriter
Any individual or employee of an insurance company who has the responsibility of accepting risks and determining in what amounts.
used car dealer bond
(See motor vehicle dealer bonds.)
U. S. Treasury Department
(See treasury limits.)
utility bond
Surety bond issued for work performed by public utility services. It is also known as state forest utility bond.
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W
wage and welfare bonds
Bond that guarantees payment from union dues and other benefits to the member of a union. Each union has their own application form. Also called a union wage bond.
weigh master bond
Appointed by the City Fire Department Chief, a weigh master is a person whose business it is to weigh ore, hay, merchandise, etc., for the public. This person has official charge of the scales maintained by a city and must weigh any commodity requested by an individual. The bond guarantees that the weigh master faithfully performs his duties.
welfare and pension plans
The Welfare and Pension Plans Disclosure Act requires disclosure and reporting of financial and other information concerning the operation of employee benefit plans subject to the act. Bonding is required to protect benefit funds against loss by acts of fraud or dishonesty. The Employee Retirement Income Security Act of 1974 requires that fiduciaries of private employee benefit plans be bonded.
work-on-hand reports
A schedule (list) of a contractor's current projects.
workers compensation self-insurers bond
A bond used to comply with workers compensation laws' financial responsibility requirements. It guarantees payment of employees.
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