funds control

Bonded Contracts – Show Me The Money! (Secrets of Bonding #139)

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 Laurel and Hardy. Ben and Jerry. Bonding companies and money. They just go together!

Let’s take a look at the focus bonding companies place on money when providing Bid and Performance Bonds. It’s a matter of survival. If called upon, the surety hopes to complete the project with the remaining (unpaid) contract funds. They track a number of elements and there are critical milestones. Learn about them so you know what’s ahead.

Of course there is a significant financial evaluation of the applicant (the construction company), a subject we have written about extensively. Visit our index of article subjects. Here we will only talk about the bonded construction project.

An early money question is “how is the work funded?” Most bonded jobs are public work. This means the project is paid for with tax dollars. On private contracts, the work can be funded in a number of ways. For commercial building, the project owner may have a construction loan or set funds aside in an escrow account. In any event, the bond underwriter wants to be sure the contractor will be paid after they incur costs for labor and material. Not being paid could cause the company to fail and result in claims on all open bonds.

Regarding the new contract, the surety will ask:

  • How often will the contractor be paid?
  • Is a portion of the contract amount paid up front, immediately when the work commences?
  • Are there Liquidated Damages – a financial penalty assessed per day for late completion of the work?

Once the contract is underway, the surety wants to monitor the money:

  • Is the job proceeding profitably, and therefore headed for a successful conclusion?
  • Do the contractor’s billings correlate with the degree of completion? It can be dangerous when they get too far ahead by billing the job aggressively.
  • Are suppliers of labor and material being paid on a current basis (by the contractor / surety client)?
  • Is the project owner paying the contractor in accordance with the written payment terms?

Sometimes underwriting issues are resolved by using a “funds administrator.” This procedure is intended to enable the contractor to perform the work, while the money handling is performed by a professional paymaster. The paymaster pays all the suppliers of labor and material, plus the contractor. This procedure minimizes the possibility of claims under the Payment Bond.

When the project reaches a conclusion, there may be important final transactions:

  • Final payment – the contractor collects the last regular payment under the contract. The bonding company issues a consent for release of this payment. If there are any problems or issues, they may withhold such approval. Underwriters can require copies of lien releases (from suppliers of labor and material) to assure that everyone has been paid – to prevent Payment Bond claims.
  • Release of Retainage – the contractor now collects a percentage of the contract amount that was methodically held back (retained) as security for the protection of the project owner. Surety consent is often required for this, too. The owner will not release this money unless all the loose ends are resolved, referred to as a “punch list.”
  • Bond “overrun” premium – normally the surety is automatically required to cover additions to the contract amount (bond automatically increases.) Therefore, they are entitled to an additional premium for such exposure. If not collected during the life of the project, this would be a clean-up item at the end. Sometimes a refund is issued for an “underrun” (net contract reduction.)

Bonus Question: Why do some underwriters require premium payment in advance for Performance and Payment Bonds?

Answer: Unlike insurance, surety obligations (P&P bonds) are not cancellable. Therefore, if the underwriter doesn’t get paid the bond premium, they are still “on” the risk!

Conclusion

Surety underwriters strive to bond reputable, capable companies. But even the biggest, best contractors cannot avoid the financial aspects that pop up during the life of all bonded jobs.  Deal with them as they arise. Now you know what to expect.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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Secrets of Bonding #137: Identify 5 Mystery Bonds Contractors Need

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Think you are pretty familiar with the various surety bonds contractors may need?  See if you can identify these five that we are commonly asked to provide by contractors and our agency partners. Also try for the Bonus Question at the end!

  • Mystery #1: In this instrument, the bonding company guarantees that a contractor / “principal” will correct defective materials and / or workmanship in a completed project.  These bonds are often written for one or two years.
  • Mystery #2: This bond is issued with a municipality as beneficiary.  It guarantees that the construction company, if allowed to disrupt public property, will restore the area after performing a contract and prevent the municipality from having to pay for such reconstruction. Hint: A plumbing contractor may need these.
  • Mystery #3: Number three is a form of financial guarantee that promises a money penalty will be paid if the construction company does not enter into a contract when expected to do so.
  • Mystery #4: This one is a guarantee that the construction company will comply with all the terms in a written contract and faithfully pay suppliers of labor and material used in connection with the project.
  • Mystery #5: Also written with a municipality are beneficiary, this bond promises that the principal will build certain “public improvements” stipulated by the municipal engineering firm. The municipality does not have a contract with the principal, nor will it pay for the work.Question mark

OK, got your answers? 

#1: This is a Maintenance Bond.  They normally are issued after the completion / acceptance of a contract.  The dollar amount is often for less than the contract.

#2: A Street Opening Bond is an example of a Permit Bond.  This enables a contractor to cut the street open for access to water and sewer connections.  If the municipality grants permission for the work, they expect it to be reconstructed in accordance with local building standards, and not at public expense.

#3: Is a Bid Bond. Bid bond amounts are often expressed as a percentage of the proposal they accompany (such as a “10% bid bond”).  This is because the actual bid amount is confidential to the bidder at the time of bond issuance.  If the bidder fails to accept an award of the contract, the bid bond penalty may be claimed by the obligee to reimburse them for going to the second (higher) proposal.

#4: A Performance and Payment Bond (aka Labor and Materialmen’s Payment Bond) is issued usually for 100% of the contract amount.  These are commonly required to protect the public interest on government contracts.  Private owners and lenders may also stipulate them.

#5: A Site Bond. Contractors sometimes ask us for these, but the correct applicant is the property OWNER, not the construction company being hired to do the work.

If the contractor furnishes this bond (we do NOT recommend this), they become obligated directly to the municipality, and must build the required public improvements even if they are not paid by the property owner.  Bad!  The site bond obligation more correctly lies with the property owner / developer.

Bonus Question: This bond is different.  It has the construction company as the obligee / beneficiary of the bond.  The “principal” (the party whose actions are the subject of the bond) are the company employees.  The bond reimburses the company for dishonest acts committed against it by its employees.  What type of bond is it?  Unscramble these letters for the answer:  

l e f i y t i d

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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The Epic Bond Battle 

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It happens this time every year. The EPIC BATTLE, the Battle Royale.  It is a Tug of War, a test of strength, a fight to the finish. What is it exactly?  It is the cage match between the Tax Advisor and the Bond Manager.

Every year contractors make an important decision.  The tax advisor says “It will be great for you to pay less taxes!”  But the Bond Manager says “It will be great for you to pay more taxes!”  Who is right?!

Actually, they both are.tug

We understand that paying the tax man is painful. You want to hang onto your money, not throw it into that black hole known as the IRS. But paying taxes has an important beneficial effect if bonded contracts are part of the strategy for the coming year.  Paying taxes can help the construction company qualify for increased levels of bonding support.

Keep in mind, the company is primarily the bond applicant.  And the bond underwriter needs to be confident that the applicant will remain in business for the completion of the bonded work, and that it is strong enough to withstand the problems that, if left unresolved, would result in bond claims.

One important element in this analysis is a review of the company financial statements.  In these reports the underwriter hopes to see financial strength and balance, profitability and good management.  In reality, you don’t have profitability and financial growth without incurring a tax bill.  So to this extent, the tax advisor and the bond manager are at odds.

Company management will make the final decision.  Where is the balance point between taxes and bonds?  It is a critical decision because the fiscal year-end results are an underwriting element that is considered throughout the year.  It directly affects the amount of surety capacity that is offered.  This will either empower the company or hinder the contractor’s ability to acquire new work for the next year.

We can help contractors make an informed decision.  It is a free service we provide to all contractors, even if they are not currently our customer. 

We need to review a draft copy of the fiscal year-end company financial statement. Tell us the amount of bonding capacity that is desired in the coming year.  We will provide a free analysis indicating if the financial statement qualifies for the desired surety credit, or if profitability levels, net worth, and ratios (and taxes!) require adjustment.  This is the contractor’s opportunity to make beneficial adjustments before the recent year is cast in stone.

KIS Surety is the national contract bond underwriting department for Great Midwest Insurance Company, a national, corporate surety with an A-8 rating.  We throw all this underwriting talent at your bond opportunities and support contracts up to $10,000,000.

If you have a contract surety case that needs a fast, creative response, call us: 856-304-7348

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Secrets of Bonding #133: “Please Sign Here” (with caution!)

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sign-here-arrow-2

We have written about indemnity agreements before (enjoy Secrets #19 and #79) but recent activity with our clients has inspired yet more on this vital subject.

As a follower of the “Secrets” series, you may already know what a General Indemnity Agreement (GIA) is, and that it is a requirement all bond applicants face.   Basically, it contains a payback obligation to the surety similar to a promissory note.

As a bond applicant, why should you be cautious when signing such documents?

The first reason is that it may include companies or individual people who are inappropriate. Some examples:

  • An affiliated company in which the bond applicant has a minority interest. These should be excluded if the bond client doesn’t have a controlling interest.  
  • Another example would be an individual person with little or no ownership in the company who is not married to an officer, key person or major company owner.

The second reason is that there may be clauses in the indemnity agreement that may be subject to negotiation – although underwriters tend to resist such modifications. Nevertheless, if you see something objectionable such as “Confession of Judgement” which is not even permitted in some states, you should ask for it to be removed. 

This would also be the time to ask for additions to the document, such as a dollar limitation on personal indemnity of certain individuals (Spouses? Minority owners?) or Trigger Indemnity which is only activated under specific circumstances.  No harm in trying.

The third reason is because of the gravity of the indemnity obligation. Through the GIA, the bond applicant company and its owners agree to repay the surety for losses and expenses.  They are literally putting everything on the line. sign-here-arrow-204x300

What is the dollar limit of this obligation?   Is it:

a) The contract amount? 

b) The Payment Bond amount?  or

c) The T-list of the surety? 

Answer: The liability amount is unlimited. 

This is a big deal. Keep in mind (see Secret #1!) “Bonds Are Not Insurance.”  The surety is a guarantor of the principal’s performance. If the contractor fails to perform, the bond is not insurance to protect them from the consequences of their failure.

In conclusion, the bond applicant should approach the signing of a GIA with some caution.  Certainly it is a document to read and manage where possible but this brings us to the final point: If you want surety bonds, it is mandatory that the surety be indemnified.  Regarding the indemnity of spouses not active in the business, they too must sign.  We tell contractors “Nobody likes it, but everybody has to do it.”

sign_here_manIf you want bonds, be cautious, but get ready to sign on the dotted line.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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Secrets of Bonding # 131: Maintenance Bonds – Breezy Free & Easy

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Free surety bonds.  Is there anything better? Actually we can think of a couple of things right off BUT…  are they good?  Sure they are.  

Everybody likes free stuff.  Trouble is, they’re not always breezy free or easy.  Sometimes they’re a huge P.I.A.  So let’s get into maintenance bonds and learn the issues.

The most common Maintenance Bond situation is a bonded public or private contract.  The specification stipulates there must be a 100% (of the contract amount) Performance and Payment Bond plus a Maintenance Bond, which is often for a lesser amount, maybe 20% of the contract price.  The maintenance bond covers the completed work for defective materials and workmanship, for a specified period of time.

The P&P bond is issued when the project commences, and the Maintenance Bond comes when the completed work is accepted.  It is common for the project owner (obligee) to write an acceptance letter regarding the proper completion of the contract, and stating that the Maintenance Bond must now be issued.

free-easyFor the surety, this bond is an easy decision.  They already got paid for the P&P bond. They already faced the risk of claim due to faulty workmanship or materials.  Now the contractor (Principal) will pay an additional premium to obtain another bond on the same work. 

In some cases the surety doesn’t even charge for this bond following their P&P obligation – breezy free and easy!  If they do charge, the rate may be less than for a P&P bond. So when is it not breezy free and easy… and why?

Timing

Maintenance bonds are normally required after the contract has been accepted (work completed). However, in some cases, the owner requires issuance concurrently – at the inception of the project. This is difficult for the surety to support because the approval of maintenance bonds may be relatively easy, but it is not automatic.  The surety must decide if they want to accept the risk associated with the maintenance obligation. In part, this is predicated on the smooth performance / completion of the contract. If the job was fraught with problems and difficult to complete, they may not want to support such an obligation.

Requiring the underwriter to issue the bond at the beginning takes away the opportunity to make an informed decision. 

General Underwriting Concerns

There is a time factor involved in each of these bonds. The surety must be confident that for the one or two-year period, the principal will be willing and able to respond to any call-backs (things that crack, malfunction, etc.)

If the applicant has recently deteriorated, such as declining credit scores or a poor financial statement, the underwriter may refuse to support their request.

Term

The duration of the maintenance obligation can present an underwriting issue. A one-year obligation is normal.  Two years may be possible.

What about five years or ten?  Probably not.

No P&P Bond

Sometimes a Maintenance Bond is requested, but there was no Performance Bond.  Or, another surety may have issued the P&P bond.

If there was another surety involved in the project, it will be very difficult to gain a new underwriter’s support – the thought being “this risk belongs to anther surety.”

If there was no P&P bond, the maintenance bond underwriter will require an Obligee’s Contract Status Report. This is the obligees written statement that the contract has been completed in a satisfactory manner, and related bills paid. A clean bill of health is needed to gain the underwriters support.

Conclusion

You wont get a maintenance request on every project.  But when you do, it may be very easy and cheap – but not always.  Now you know why.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

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Secrets of Bonding #127: “The Call”

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A couple of times every week we talk to a new contractor who wants to get their bond account set up for the first time.  Here’s how it always goes:

  • Contractor: We want to go after bonded projects but we’ve never had bonds before.  What’s involved?
  • Surety: OK Hi! Who am I speaking to?
  • Contractor: I’m Humphrey.
  • Surety: All right Humphrey, can we start by asking you a few questions?  What is the size and nature of the work you intend to pursue?TelefMan-07

Scenario #1 (Pursuing contracts up to $500,000)

  • Contractor: We have performed residential and light commercial work.  We want to go after general construction contracts up to about $250,000.
  • Surety: Great! Tell me the ownership and structure of your company.
  • Contractor: The company is an LLC owned by me and my partner, Bogart.
  • Surety: Are you married?
  • Contractor: Yes, but not to each other.
  • Surety: We have a very easy program that may be a perfect starting point for you.  To be eligible, the owners and spouses must have good personal credit reports. Are the reports favorable?
  • Contractor: Yes.
  • Surety: There are some other criteria.  For example, the program cannot be used for long-term contracts or difficult / unique construction – needs to be plain vanilla.  The good thing is that no financial statements or other documentation is required, only a simple, short app. If this program fits your needs, you’ll never find anything easier or faster! Give me your email address and we’ll send you the FASTAPP.  We can probably get you pre-qualified within 24 hours!

Scenario #2 (Pursuing contracts in excess of $500,000, or for applicants with low credit scores)

  • Surety: We find that most contractors are able to qualify for bonding if their account is developed properly.  That’s where our expertise (since 1979!)  comes into play.
  • Contractor: What info will be needed?
  • Surety:  Getting approved for bonding is like applying for a bank loan. The same kind of financial and background info is needed.  Your relationship with the surety is similar to banking and you promise to protect the surety from loss, just like signing a promissory note with a lender.  That’s why surety bonds are not insurance policies.
  • Contractor: OK what’s the next step and how much does it cost?
  • Surety: We don’t charge for setting up your account!  We’ll send you an email with a list of items that are needed initially.  Gather as much as you can and send over so we can get started.  The process normally takes a week or two.  You don’t pay until you win a contract and need a performance bond.

Conclusion

Have we oversimplified the process? Actually, no.  It is easier than people assume to get their bond account arranged – when you know the ropes.  That’s our niche.  We don’t pretend to be good at everything, but we are experts at this!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #126: Surety Bonds in the Bizarro World

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There have been 24 movies about Superman, but I loved the original TV series starring George Reeves (the real Superman). Even before that, there were Superman comic books published by DC Comics.

BizarroThe character, “Bizarro #1,” first appeared in 1958 – a mirror image of Superman but from a world where everything was opposite from that of humans. That was over 50 years ago, but strangely, there is a little piece of Bizarro World that still survives today. It is alive in our surety rate system. See if you agree…

Example #1

A contractor won a $1 million contract. The specification calls for a 50% performance bond: $500,000. The surety’s maximum exposure is $500,000.

Bizarro Fact: The bond rate is based on the contract amount, the full $1 million!

Example #2

Sureties often issue a Performance and Payment Bond in a single combined instrument that states the bond amount once (the penal sum). However, if required, they will issue two separate instruments, one Performance and the other Payment, each with it’s own penal sum (double the amount in the combined bond form.)

Bizarro Fact: When required to issue this double bond amount, the bond premium remains the same as for the combined bond form!

Example #3

The contractor has already started the project. Now it has been verified that 50% of the work is completed and accepted by the project owner. It is confirmed that all related bills have been paid. It is apparent that 50% of the exposure has been eliminated.

Bizarro Fact: The bond costs the same as if it had been issued at the start of the work. There is no reduction or recognition for the portion of the exposure that has been eliminated.

Example #4

The contractor has negotiated a $1 million contract. Now the project owner has indicated that a P&P bond must be provided. The surety states that the cost of the bond will be 2% of the contract amount. Is the cost 2% of $1 million ($20,000)?

Bizarro Fact: No! The correct calculation is 2% of $1,020,000 or $20,400. The bond premium is calculated on itself, even though it cannot be classified as part of the contract exposure.

There you have it: The upside-down world we actually live in. Naturally there are justifications for all the procedures sureties use, but still, they are Bizarro!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #124: Underwriting Challenge – What’s Wrong With This Picture?

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Years ago when I was just a cub reporter for the Daily Planet, I mean surety underwriter, I ran into a strange situation that was recently repeated.  In this article we will present the scenario and ask you to use your underwriting judgement. The question is… “What’s wrong with this picture?”

Scenario #1

Originally this came up on a Lost Instrument Bond.  These are needed when requesting the issuance of a duplicate cashier’s check, security, or other financial instruments.  The applicant claimed a negotiable instrument (anyone holding it could potentially cash it in) had been inadvertently destroyed. He was a young adult in his 20’s who had inherited the asset.  His financial statement showed little other than the asset in question, which was a problem because the underwriters do not want to feel that the person has a reason to fraudulently convert the “lost” asset and it’s replacement.

We wrote back and expressed the underwriting concern, that the applicants financial position was inadequate.  In response we received a novel proposal: When the replacement instrument is issued, it will be conveyed directly to the surety who can hold it as full collateral against their exposure, until the bond is released (years!) “There will be no risk to the surety.”  Sounds pretty good? 

In my infantile underwriting mind I thought this sounded intriguing, but it also made me uncomfortable. Why had I never heard of doing this before? Maybe I was on the verge of creating an entirely new underwriting procedure.  Will they name it after me?

What was wrong with this picture?

Scenario #2Whats_wrong

In the more recent situation, the surety was being asked to support a multi-million dollar purchase transaction.  The applicant (a person) was a foreigner, an accomplished business person, who was not familiar with surety underwriting requirements.  They were not accustomed to providing personal financial info or involving the spouse in business obligations.

As a way of supporting the transaction, and maybe dodging the indemnity requirements, it was suggested that title to the purchased property would be conveyed directly to the surety (sound familiar?).  After the financial transaction (which was the subject of the surety guarantee) is completed, the surety will be released, the title will be transferred to the buyer, and “the surety will never be in a position of risk.” Boom!  Let’s do it!

What’s wrong with this picture?

The Answer

Here is good advice.  If your underwriting brain feels like something is wrong, it probably is!  The problem with both these scenarios is the timing.  

Bonding companies ALWAYS secure their position before assuming an obligation. It is incumbent on the underwriters to protect their company assets and its owners by doing so. 

Think about bank lending practices, which are not unlike surety underwriting.  Would a bank make a building loan relying solely on the future value of the project? No, they require being secured with sufficient assets in advance such as the company and personal net worth of the applicant and possibly other collateral.

Financial obligations always require that the credit grantor be secured in advance. Prudent decision making requires this.

So the next time you see something that doesn’t feel right, trust your gut.

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #123: Who Was Edward Aloysius Murphy, Jr. (& Why Contractors Should Care)

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(January 11, 1918 – July 17, 1990) An American aerospace engineer who worked on safety-critical systems for the U.S. Air Force. He is best known for his namesake Murphy’s Law, which  states, “Anything that can go wrong will go wrong.”  Murphy regarded the law as crystallizing a key principle of defensive design, in which one should always assume worst-case scenarios.Murphys_Law

Keeping Major Murphy’s principle in mind, what are the critical steps contractors can take to get their projects off on the right foot, and bring them to a successful conclusion – while keeping Murphy’s Law out of the equation?

The first key to having a successful contract is to have a contract. It sounds obvious, but contractors are sometimes induced to start work, or perform change orders / additions to contracts, without an executed document in hand.  Maybe the project owner is in a rush, “We need for you to start right away so we can be completed on time.  We’ll do the paperwork later.”

The contractor wants to maintain good will.  They proceed in the hope that their responsiveness will pay off – and sometimes it does.  There are also times when the contractor incurs costs that are never reimbursed because the contract is not executed.  There could be engineering problems, governmental interference or lack of funding. There are any number of reasons for things to go wrong (as our hero indicated.) And for the contractor, they are all bad.

murphyslaw

On the other hand, let’s say there is no problem with the contract.  The paperwork is signed, the work proceeds, is paid for, and the contract is completed with a profit in hand. Is that the end?

No, not quite. Just like there is paperwork to get into the project, there is more to get out of it.  The contractor should obtain written acceptance of the work by the job owner (obligee.) 

  • This important document establishes a completion date for the contract and concludes a portion of the liability that is attached to all open contracts.
  • It will close the Performance and Payment bond if there was one. Closing the file restores the contractors bonding capacity. 
  • It may also be beneficial with lenders.
  • If nothing else, a written acceptance may be a defense when the project owner attempts to call back the contractor at a later date or claim the work was not satisfactory.

Edward_MurphyThese simple procedures are basic, good business practices. Contractors who win work competitively, and are paid under a lump sum contract, already face significant risks.  It is important to have the correct paperwork in hand when starting, modifying, and ending construction projects. 

Major Murphy learned this important lesson the hard way – but you don’t have to! 

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.

Secrets of Bonding #121: Are Court Bonds Like Fruit?

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produce_manMostly we issue site, subdivision and contract surety bonds (Performance & Payment).  However, we are also an important provider of Court and Probate bonds.  We issued a number of interesting court bonds recently so here is some info on this subject.

What Are Court Bonds Are Why Are They Needed?

Generally, court bonds serve three purposes.

  1. They provide required protection for the other party in the litigation (opposite the bond applicant)
  2. They guarantee the payment of related court costs
  3. The court likes them

An Injunction Bond is a good example.  In these legal actions one party wants to limit or prevent the actions of another.  An insurance agency may request an injunction to prevent a former salesman from soliciting their clients.  The court requires the plaintiff (insurance agency) to provide a bond for the protection of the defendant (salesman) in the event it is found that (s)he has been wrongfully restrained.

A Replevin Bond is similar.  These are required when the plaintiff (a bank) wants to seize an asset (your private jet) for failure to pay your finance charges.  The bond will protect you if it is later found they wrongfully seized “Wings Over Yonkers.”  See how these work?  In different situations the bonds provide the same type of function.  The name of the bond identifies the underlying legal action.

Why Do Courts Like Them?

You may think “what’s not to like?!” That’s true. But the court may require a surety bond for a practical reason.  If the litigation involves a financial matter, they could require that an escrow deposit be placed with the court for the benefit of the other party. They would hold this money until the case is decided.

This works, but is not convenient.  Where will the funds be held?  Who is responsible for their safekeeping?  Will there be periodic accounting if the case runs for years?  Who pays the expenses associated with this?  What if the money is misplaced or stolen? 

Compare this to a surety bond: Get the bond, throw it in the folder. Done!

cherriesEven though the court may have the option to take cash in lieu of bond, they may demand the issuance of a surety bond simply for its convenience.

Other Court Bonds

When a money judgment is rendered, the defendant may want the matter heard by the Appellant Court. Let’s say Maynard sued Dobie for money and wins a $10,000 judgment.  Maynard figures “Ok here comes 10 big ones!”  However, Dobie wants to dispute the decision so now Maynard has to wait.

In order to bring the Appeal, Dobie must obtain an Appeal Bond which protects the interests of the court and guarantees prompt payment if Dobie loses again.  To get this bond, he’ll have to give his personal financial statement, his indemnity, and put up maybe $11,000 for the surety to hold.  Oh, and pay the bond premium!  Why is all this necessary?

Bond underwriters know that most defendants lose at the Appellate level.  They also know that the court will simply claim on the bond to pay off the judgement.  This means that underwriters expect full penalty claims on defendant’s appeal bonds – which is why they normally require full collateral for the judgment amount plus interest and expenses.nanners

Conclusion

Hopefully it is apparent that there is a thread of similarity between these different types of court bonds.  This can make it easier to understand them when tey are needed.

Oh, so why are court bonds like fruit?  Because they have appeal!

FIA Surety is a NJ based bonding company (carrier) that has specialized in Site, Subdivision and Contract Surety Bonds since 1979 – we’re good at it!  Call us with your next one.

Steve Golia, Marketing Mgr.: 856-304-7348

First Indemnity of America Ins. Co.