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
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What are surety bonds?
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Surety Bond – a written contract in which one
party guarantees another party’s performance
for a third party or –
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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
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Two basic types of surety bonds
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Contract Bonds
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Commercial Surety Bonds (non Contract)
Types of Surety Bonds
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Contract Bonds
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Guarantee the performance of the Contractor
Commercial Surety Bonds
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Guarantee the performance of obligations other
than contracts i.e license bonds, public officials,
executors, etc.
Types of Surety Bonds
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Contract Bonds
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Bid Bonds
Performance Bonds
Payment Bonds
Maintenance Bonds
Supply Bonds
Subdivision Bonds
Types of Surety Bonds
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Types of Surety Bonds – Contract Bonds
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Contract Bonds – guarantee performance of contractual
obligations –
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Bid Bonds
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If bid is awarded the principal will enter into the contract and will
furnish required bonds
Performance Bond
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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
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Types of Surety Bonds - Contract Bonds –
Continued
 Payment Bonds –
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Guarantee that bills for labor and materials will be
paid in accordance with the contract terms
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The Miller Act
Maintenance Bonds
Guarantee the contractor will correct faulty work and
replace defective materials for a specified period
Types of Surety Bonds
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Types of Surety Bonds - Miscellaneous Contract
Bonds
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Supply Contract Bonds
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Guarantees the supplier will deliver items for job
Subdivision Bonds
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Guarantees the contractor (developer) will complete
improvements required by ordinance
Types of Surety Bonds
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Types of Surety Bonds - Miscellaneous Contract
Bonds
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Supply Contract Bonds
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Guarantees the supplier will deliver items for job
Subdivision Bonds
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Guarantees the contractor (developer) will complete
improvements required by ordinance
Surety Bonds vs Insurance
Let’s Take a Break!
Types of Surety Bonds
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Commercial Bonds – Non contract
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License and Permit Bonds
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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
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Commercial Bonds Non Contract - Permit
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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
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Non Contract Bonds Continued
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Public Official Bonds (Non-Federal)
Guarantees Honesty and Faithful performance
Types of Surety Bonds
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Miscellaneous Bonds
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Court Bonds -Guarantee a person will faithfully
perform certain duties prescribed by law
Judicial Bonds – Arise out of litigation and are
required by Courts
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Attachment Bonds
Release of Attachments
Plaintiff’s Appeal Bond
Defendant’s Appeal Bond
Types of Surety Bonds
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Miscellaneous Court Bonds
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Fiduciary Bonds
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Guardians
Administrators and Executors
Trustees in Bankruptcy
Types of Surety Bonds
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Miscellaneous Surety Bonds
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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
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Why do I care?
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Broadens products provided to customers
Helps gain new customers
Increased profit to agency
Characteristics of Surety Bonds
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Characteristics of Surety Bonds
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Surety must respond
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If the principal fails to perform – surety will be looked
at to respond
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They can pay – up to the bond penalty
Do the work – or find someone
The Principal will have to reimburse (indemnity)
Underwriting Surety Bonds
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Characteristics of Surety Bonds
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The surety only issues bonds if they are
convinced the principal can perform
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Three C’s of Underwriting
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Character
Capacity
Capital
Underwriting Surety Bonds
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Characteristics of Surety Bonds
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Bonds guarantee performance for a particular job
and usually terminate when the obligation is
fulfilled
This could be over several years
Underwriting Surety Bonds
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Characteristics of Surety Bonds
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Surety Bonds have penalties (penal amount)
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The limit of liability for the bond
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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.
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Surety will ask for collateral – usually 125% of penalty
Underwriting Surety Bonds
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Characteristics of Surety Bonds
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Require a premium
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Serious – because we cannot cancel a bond!!!!
Characteristics of Surety Bonds
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Characteristics of Surety Bonds
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Bonds must be in writing to be binding and
enforceable.
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No oral binders
Subject to Statute of Fraud
Underwriting Surety Bonds
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Small Business Administration (SBA)
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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
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Producer
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Underwriters
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It’s a Partnership
Key Marketing Principals
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Product
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Promotion
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Place
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Price
Introduction to Surety Bonds
Thanks for Attending