Surety Bond Glossary
Glossary terms
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A
Advance Payment Bond
An advance payment bond protects money paid before a contractor starts the required work. The bond may reimburse the project owner when the contractor misuses the payment or fails to begin the work.
Alcohol Bond
An alcohol surety bond is a financial guarantee that an alcohol business will follow federal and state alcohol laws. It also guarantees payment of required taxes, fees, and penalties. Many states require the bond before issuing an alcohol license or permit.
B
Bid Bond
A bid surety bond guarantees that a contractor who wins a project will sign the contract at the bid price. It guarantees the contractor will furnish required performance and payment bonds. If the bidder backs out, the owner can claim against the bond and the contractor must reimburse the surety.
Blanket Fidelity Bond
A bond which covers loss of money, merchandise, or other property owned by the insured or in which he/she has a pecuniary interest, when such loss is due to dishonesty of his/her employees. All employees are covered under the bond unless specifically excluded.
Bond
Generally speaking, 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.
C
Collateral
Commercial Blanket Bond
A blanket fidelity bond issued in a stated amount on all regular employees of commercial establishments covering against loss from employees’ dishonest acts.
Commercial Bond
Also called business bonds or commercial surety bonds, commercial bonds protect businesses by providing a financial guarantee of services and a defense for customers against risk.
Construction Bond
A construction bond is a type of surety bond used by investors in construction projects. Construction bonds are a type of surety bond that protects against disruptions or financial loss due to a contractor’s failure to complete a project or failure to meet contract specifications.
Continuity Clause
The clause in a bond, or rider attached to a bond, under which that bond, subject to its terms, assumes liability for any loss due to acts which occurred while a prior bond was in force, but which were not discovered until after the expiration of the discovery period of the prior bond.
Contract Bond
A guarantee of the faithful performance of a construction contract and usually the payment of all labor and material bills related to it. In those situations where two bonds are required – one to cover performance and the other to cover payment of labor and materials – the former is known as a performance bond, and the latter as a payment bond.
Contract Price
The whole sum of money which passes from the owner to contractor when final settlement is made between the two under the contract, the basis for the premium charge on most types of construction and supply contract bonds.
Corporate Surety
A corporation licensed under various insurance laws, which under its charter, has legal power to act as surety for others.
Cost Bond
One required of a litigant conditioned for the payment of the costs of the litigation, such as fees of the court clerk, sheriff, etc.
Countersignature
A signature of a licensed domiciled agent or representative required by the laws of some states to validate the bond.
D
Dishonesty Insurance
A generic term describing fidelity bond coverage guaranteeing against loss caused by dishonest officers or employees of a commercial firm or by dishonest public officials or employees.
E
Earned Premium
The premium amount which would compensate the surety for the protection furnished for the expired portion of the term of the bond.
Effective Date
The date from which bond coverage is provided.
Endorsement
A form attached to the bond to add to, alter, or vary its provisions. Sometimes called a rider.
Expiration
The date upon which a bond will cease to provide coverage unless previously cancelled.
F
Fidelity Bond
Fiduciary
A person who occupies a position of trust, particularly one who manages the affairs or funds of another.
Fiduciary Bond
Required of administrators, executors, guardians, committees, etc., guaranteeing faithful performance of duty in accordance with the laws applicable to the trust. Frequently called a probate bond because the bond is customarily filed in a probate court.
Financial Statement
A balance sheet which the surety requires of an applicant for a bond (particularly a contractor), setting forth his/her financial position as of a given time or period.
G
H
I
Indemnify
To compensate for actual direct loss sustained under a bond. There can be no recovery on a bond until the obligee has actually suffered a loss.
Indemnitor
One who enters into an agreement with a surety company to hold the surety harmless from any loss or expense it may sustain or incur on a bond issued on behalf of another.
Indemnity Bond
A general term describing any bond which protects the obligee against direct loss which may arise as a result of failure on the part of a principal to perform.
J
K
L
Liability
This is a broad term denoting any legally enforceable obligation.
License Bond
Used interchangeably with the term “permit bond” to describe bonds required by state law, municipal ordinance or regulation, to be filed prior to the granting of a license to engage in a particular business or a permit to exercise a particular privilege. Such bonds provide payment to the obligee for loss or damage resulting from violations by the licensee of the duties and obligations imposed upon him/her.
Lien
A charge upon real or personal property for the satisfaction of a debt.
Limit of Liability
The maximum amount which a surety company will pay in case of loss. Sometimes called the bond penalty.
Lost Instrument Bond
A bond given by the owner of a valuable security (stock, bond, promissory note, certified check, etc.) which is alleged to have been lost or destroyed. It protects the issuer of the security against loss which may result from the reinsurance of a duplicate or, in some instances, payment of cash value thereof.
M
Maintenance Bond
The normal coverage provided by a maintenance bond is a guarantee against defective workmanship or materials. However, maintenance bonds sometimes incorporate an obligation guaranteeing “efficient or successful operation” or other obligations of like intent and purpose.
Minimum Premium
The least amount a surety company may charge for a particular bond for a designated period.
Miscellaneous Indemnity Bonds
Bonds which do not fit any of the well recognized divisions or subdivisions.
N
O
Obligee
The party in whose favor a bond runs; the party protected by the bond against loss. An obligee may be a person, firm, corporation, government, or an agency of a government.
Obligor
Sometimes called the principal, or one bound by the obligation. Under a surety bond, both principal and surety are in a sense, obligors, since the surety must answer if the principal defaults.
P
Penal Sum
The maximum amount for which a surety company may normally be held liable under the bond. Also called the bond penalty. See also limit of liability.
Performance Bond
A bond which guarantees faithful performance of the terms of a written contractor for furnishing supplies or for construction of all kinds. Performance bonds frequently incorporate payment bond (labor and materials) and maintenance bond liability.
Power of Attorney
The authority given one person or corporation to act for and obligate another, to the extent set forth in the instrument creating the power.
Premium
The fee to be paid for the bond. The cost of the bond.
Principal
The one who is primarily bound on a bond furnished by a surety company.
Pro Rate Cancellation
Cancellation of a bond when the portion of the premium returned is the full proportionate part due for the unexpired period. Distinguished from short rate cancellation.
Public Insurance Adjuster Bond
A public insurance adjuster bond is a type of insurance for adjusters, and in many states, a requirement to be certified. The required bond value depends on your state. It will give your clients peace of mind that they will be protected in case of an error.
Public Official Bond
A bond that guarantees faithful performance of duty of a public official in a position of trust; also provides for an honest accounting of all public funds handled by him/her. Such bond is given to comply with a statute and, therefore, carries whatever liability the statute imposes.
Q
Qualifying Power
The largest net amount of risk which may be carried by a surety company on a bond.
R
Rate
The cost of a unit of bond coverage. Such unit is usually in the denomination of $1,000.
Rider
A printed form of special provision added to a bond. Sometimes called an endorsement.
S
Subcontract Bond
One required by a general contractor of a subcontractor, guaranteeing that the subcontractor will faithfully perform the subcontract in accordance with its terms and will pay for labor and material incurred in the prosecution of the subcontracted work.
Subdivision Bond
One required by a general contractor of a subcontractor, guaranteeing that the subcontractor will faithfully perform the subcontract in accordance with its terms and will pay for labor and material incurred in the prosecution of the subcontracted work.
Surety Bond
An agreement providing for monetary compensation should there be a failure to perform specified acts within a stated period.
T
Term
A period of time for which a bond is issued.
Third Party Bond
A license bond which gives parties other than the named obligee a right of action in their own name to recover loss or damage resulting from a breach by the licensee of his/her obligations under the law, ordinance or regulations under which the bond is required.
U
Underwriter
An officer or employee of a surety company who has the responsibility for accepting risks.
V
W
X
Y
Z
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