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FIL 350 - Chapter 13

Surety Bonds

3 parties in a surety bond 1. Principal: the party who agrees to perform certain acts or fulfill obligations 2. Obligee is party who depends on principal's promise 3. Surety (insurer) guarantees performance of principal
Surety bond A contract to guarantee the performance of someone else - Similar to insurance contracts - Principal pays premium for guarantee, but surety pays losses incurred by obligee
Surety bonds vs. insurance contracts Surety bonds: 3 parties, not 2. - No losses expected - Surety has legal right to recover loss pmt - Principal pays premium, but doesn't receive any pmt - Indefinite period of coverage - Performance may be in control of principal
Bid bonds - If principal doesn't perform, pmt from bond is diff between principal's bid & next lowest bid - Purpose is to provide assurance that (sub)contractors will be available if bid accepted
Performance bonds - Make surety responsible for completing a project upon default of principal - If default: can complete contract w/ existing or new contractor, or pay owner any diff in cost for completing work - Surety will seek repmt from principal
Payment bonds Ensure suppliers/workers of principal get paid - Protects obligee since liens may be placed on prop
Maintenance bonds - Guarantees workmanship for a specific period after completion of work (typically 1 yr) - May be part of performance bond for short term guarantees
License and permit bonds Guarantee that principal will comply w/ all laws and regulations that govern his or her activities - Obligee = gov't entity - Often 1 yr guarantees - Provides extra confidence for public
Compliance bonds - Principal will comply with laws and regulations (like a plumber)
Tax bonds - Guarantees businesses will remit collected taxes (gas station) - means they will give that $ to gov't
Public official bonds - Appointed or elected officials have duty to protect public interest - These bonds guarantee honesty and faithful compliance of public officials - Help hold them financially responsible for their actions
3 types of public officials 1. Administrative (don't handle $) 2. Officials who handle $ (riskiest types of bonds) 3. Officials w/ direct public involvement (police), also risky.
Attachment bonds - Required if property is attached in a legal proceeding
Bail bonds - Bail is prop or $ posted to allow accused person to be released prior to trial - Bail bond is a guarantee defendant will show up to court - If no-show, bail bond pays court full amt of bail - Fee is typically 10% of bail amount
Fiduciary bonds Hold principal and surety jointly liable to obligees for faithful performance of specified duties - Guarantees full accting of all prop received (to bond limit) - Remain in force until all court obligations are complete
Principal The party who has the obligation to perform for the obligee's benefit.
Obligee Party that receives guarantee that the principal will fulfill the obligation promised.
Surety Guarantees performance of principal (usually an insurer).
Suretyship The obligation of an entity to answer for the default of performance of duties by another.
Contract Bond Guarantees the fulfillment of obligations under construction or other contracts.
Subdivision Bond Contract bond guaranteeing a local government authority that a subdivision developer will complete the project in accordance with approved proposals.
Supply Contract Bond Contract bond guaranteeing a supplier will perform supply contract according to specifications.
Court Bond Guarantee that an individual/organization will perform duties prescribed by law/court or will demonstrate financial responsibility for the benefit of another until a court reaches a final decision.
Release of Attachment Bond Guarantees that the defendant will pay any damages and court costs if the court should decide in the claimant's favor.
Defendant's Appeal Bond (supersedeas bond) Guarantees a defendant will pay all court costs when appealing to a higher court, should the higher court sustain the initial judgment.
Appeal Bond Guarantees the plaintiff will pay all court costs should they appeal an adverse decision to a higher court.
Miscellaneous Bond Any bond that does not fit well under other categories of surety bonds.
Judicial Bond Guarantees the principal (plaintiff or defendant) will fulfill certain obligations specified by law.
Created by: FIL350
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