Surety Bonds vs Insurance
Professional Insurance Agents of NC-Provider#: 16241
Instructor: Chris McLeod
CPCU,CIC,ARM,AIM,AAI,AU,AIP,CRIS,AINS,CISR,CPIW
Course #: 205632 3.0 Hours NC General CE
Copyrighted material (07/2016) of the PIA of NC, No distribution or copying
allowed without the express written consent of PIANC
Introduction to Surety Bonds
What are surety bonds?
Surety Bond – a written contract in which one
party guarantees another party’s performance
for a third party or –
A written contract that expresses one party’s
promise to answer for another party’s failure
to do something as promised.
Bonds vs Insurance – 4 differences
1. There are three parties to a contract
2. The principal is liable to the surety for losses
paid by the surety
3. The surety should not sustain any losses on
surety contracts (in theory)
4. The coverage period is indefinite
Parties to a Bond
Bonds are not Insurance!
Three parties instead of two
Principal – Obligor
Obligee
Surety
Types of Surety Bonds
Two basic types of surety bonds
Contract Bonds
Commercial Surety Bonds (non Contract)
Types of Surety Bonds
Contract Bonds
Guarantee the performance of the Contractor
Commercial Surety Bonds
Guarantee the performance of obligations other
than contracts i.e license bonds, public officials,
executors, etc.
Types of Surety Bonds
Contract Bonds
Bid Bonds
Performance Bonds
Payment Bonds
Maintenance Bonds
Supply Bonds
Subdivision Bonds
Types of Surety Bonds
Types of Surety Bonds – Contract Bonds
Contract Bonds – guarantee performance of contractual obligations –
Bid Bonds
If bid is awarded the principal will enter into the contract and will furnish required bonds
Performance Bond
Guarantees the project will be completed according to the contract, plans and specifications and at the agreed price and stipulated time
Types of Surety Bonds
Types of Surety Bonds - Contract Bonds –Continued
Payment Bonds –
Guarantee that bills for labor and materials will be paid in accordance with the contract terms
The Miller Act
Maintenance Bonds
Guarantee the contractor will correct faulty work and replace defective materials for a specified period
Types of Surety Bonds
Types of Surety Bonds - Miscellaneous Contract
Bonds
Supply Contract Bonds
Guarantees the supplier will deliver items for job
Subdivision Bonds
Guarantees the contractor (developer) will complete
improvements required by ordinance
Types of Surety Bonds
Types of Surety Bonds - Miscellaneous Contract
Bonds
Supply Contract Bonds
Guarantees the supplier will deliver items for job
Subdivision Bonds
Guarantees the contractor (developer) will complete
improvements required by ordinance
Surety Bonds vs Insurance
Let’s Take a Break!
Types of Surety Bonds
Commercial Bonds – Non contract
License and Permit Bonds
Compliance Bond – Principal will comply with laws that govern particular business ie plumbers permit
Compliance with 3rd Party Liability – Gives 3rd party right to sue i.e. auctioneers bond
Forfeiture Bonds – Surety will pay entire bond amount
Tax Bonds – Principal will account for and remit taxes – fuel tax bonds
Types of Surety Bonds
Commercial Bonds Non Contract - Permit Merchandising and Dealer Bonds – Principal will
conduct activities according to law and will account
for funds held in trust – ie motor vehicle dealer bonds
Reclamation and Environmental Protection – Principal
will restore land to original state after operations
including clean up
Types of Surety Bonds
Non Contract Bonds Continued
Public Official Bonds (Non-Federal)
Guarantees Honesty and Faithful performance
Types of Surety Bonds
Miscellaneous Bonds
Court Bonds -Guarantee a person will faithfully
perform certain duties prescribed by law
Judicial Bonds – Arise out of litigation and are
required by Courts
Attachment Bonds
Release of Attachments
Plaintiff’s Appeal Bond
Defendant’s Appeal Bond
Types of Surety Bonds
Miscellaneous Court Bonds
Fiduciary Bonds
Guardians
Administrators and Executors
Trustees in Bankruptcy
Types of Surety Bonds
Miscellaneous Surety Bonds
Lost Securities – Principal will indemnify obligee for financial loss suffered because of duplicate securities issued
Hazardous Waste Removal – Principal will comply with federal and state law for closure of waste facilities
Credit enhancement financial guaranty bonds –Principal will pay interest to investors as promised and return principal at maturity
Surety Bonds vs Insurance
Let’s Take a Break!
Surety Bonds vs Insurance
Why do I care?
Broadens products provided to customers
Helps gain new customers
Increased profit to agency
Characteristics of Surety Bonds
Characteristics of Surety Bonds
Surety must respond
If the principal fails to perform – surety will be looked
at to respond
They can pay – up to the bond penalty
Do the work – or find someone
The Principal will have to reimburse (indemnity)
Underwriting Surety Bonds
Characteristics of Surety Bonds
The surety only issues bonds if they are
convinced the principal can perform
Three C’s of Underwriting
Character
Capacity
Capital
Characteristics of Surety Bonds
Bonds guarantee performance for a particular job
and usually terminate when the obligation is
fulfilled
This could be over several years
Underwriting Surety Bonds
Underwriting Surety Bonds
Characteristics of Surety Bonds
Surety Bonds have penalties (penal amount)
The limit of liability for the bond
Usually the maximum the surety is obligated to pay
Producers should advise client that court costs and interest
can be paid in addition to the penalty.
Surety will ask for collateral – usually 125% of penalty
Underwriting Surety Bonds
Characteristics of Surety Bonds
Require a premium
Serious – because we cannot cancel a bond!!!!
Characteristics of Surety Bonds
Characteristics of Surety Bonds
Bonds must be in writing to be binding and
enforceable.
No oral binders
Subject to Statute of Fraud
Underwriting Surety Bonds
Small Business Administration (SBA)
Guarantees to reimburse a participating surety for
portion of loss
Designed for small contractors without capital
SBA does not issue bonds
Producer and Underwriters Roles
Producer
Underwriters
It’s a Partnership
Key Marketing Principals
Product
Promotion
Place
Price
Introduction to Surety Bonds
Thanks for Attending
