Bond Terms
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Glossary Of Bond Terms

Administrator Bond:

See Fiduciary Bond.

Agent:

Only licensed, Property & Casualty insurance agents can solicit and sell surety bonds. Surety agents are licensed insurance agents who specialize in surety bonds. Most surety agents operate as independent agents, representing several different Surety Companies.

Attorney In Fact:

The bond agent who contracts with sureties to write bonds and sign on their behalf.

Authority Agreement:

An agreement between the agent and the surety governing the use of the Power of Attorney.

Bid Bond:

Assures owner will be paid the bid bond amount if the contractor is awarded the job but later refuses to undertake the job.

Bond:

A contractual guarantee made up of three parties, each bound to the other for a specific business purpose. Differs from insurance as follows:
1. The premium is a fee for the service provided and not "pooled" to pay losses.
2. A bond guarantees credit, performance or integrity - not physical loss.
3. The Surety is liable only after the principal is unable to complete a project or respond as promised.

"Bond Back":

Occasionally the Surety will as part of their underwriting requirements require the General Contractor to have one or more of their major Subcontractors to be "bonded back" to the General, to reduce the risk of default.

Bond "Line":

A Contractor will want to know how many and what size jobs the surety will bond over the course of a year. The surety may establish a single bond size limit and an aggregate limit of all work they are willing to bond for a specified time.

Bond Penalty:

The amount of the bond.

Bond Term:

May be a specific period of time or continuous until terminated by one of the parties to the bond.

Broker:

An intermediary that brings an application for a bond on behalf of a client to an agent or bonding company and receives compensation ONLY from the client.

Collateral:

Assets pledged to the surety to secure the principal's indemnity. The collateral will be cashed if a loss occurs.

Contract Price:

The amount of the contract. May not be the same as the bond amount.

Co-surety:

Two or more sureties on a bond.

Court Bond:

Guarantees that a judgment will be paid if an appeal is lost.

ERISA or Pension Bond:

(See Fidelity Bond) Reimburses for theft of a pension or profit sharing plan's assets by the plan sponsor and administrator.

Executor Bond:

See Fiduciary Bond.

Exoneration:

Exoneration is a surety term that describes when a bonded obligation on the part of the surety ends. This usually does not occur until the warranty period of a project had ended. Which means that the surety still has potential liability well after the project is complete. The surety actively seeks exoneration of all bonds from the owner/obligee.

Fidelity Bond:

Reimburses an organization for employee theft.

Fiduciary Bond:

Guarantees that an individual or organization will safeguard assets of another that have been placed under their control.

Guardian Bond:

See Fiduciary Bond.

Indemnity:

The principal's guarantee to reimburse the surety for any loss it might sustain on a bond.

Judicial Bond:

See Court Bond and Fiduciary Bond.

License & Permit Bond:

Guarantees a person or organization will perform according to the laws and statutes of a particular business or industry.

Notary Bond:

See Public Official Bond.

Obligee:

The person or firm that is the beneficiary of the bond.

Payment Bond:

Guarantees a contractor will pay fees owed for labor and materials on a construction project.

Performance Bond:

Guarantees a contractor will perform according to the specifications in the construction contract.

Power of Attorney:

A legal instrument authorizing an agent of the surety to sign a bond on behalf of the surety as its attorney-in-fact.

Premium:

The premium is the cost of the bond, paid to the surety for providing the financial guarantee and for performing all underwriting. Unlike insurance, the premium is not based on a probability of loss. It is strictly a fee for service. The premium charged is based on the Contract Amount, but may be a flat percentage rate. Premium rates vary by surety, but usually range from 1.5% to 3%.

Premium Adjustment:

If there is a change order issued on a contract the surety will issue a premium adjustment notice to charge or reduce premium if the contract goes up or down.

Principal:

The person or firm who is bonded to another entity by the surety.

Public Official Bond:

Guarantees to the Local, State or Federal Government the honest performance of an elected or appointed government official.

Reinsurance:

Like insurance companies, most Sureties will negotiate a contract with a large Reinsurance company. The Reinsurance Company will take a large portion of any major loss a surety might have. On large bonds the approval of the Reinsurance Company may be required.

Subdivision Bonds:

Whenever a Contractor or Developer sub-divides or improves a piece of Property the local city or county planning or zoning department will often require Sub-Division bonds. The Surety is providing a financial guarantee that developer or Contractor will properly complete all of the offsite improvements that are required as a condition of the permit. These requirements could include all utilities, streets, curb and gutters, sidewalks, grading, landscaping, survey monuments and more.

Surety:

The entity guaranteeing the performance of the principal to the obligee.

Temporary Administrator Bond:

See Fiduciary Bond.

Treasury Listing:

The US Government list of eligible sureties and the limits allowed to write a bond on federal contracts.

"Underwriting":

A term borrowed from insurance this is a process where the Surety investigates the Contractor's Character, Capacity and Capital to determine if the contractor is qualified, by the Surety's standards, to undertake the project. This process is very much like qualifying for a loan, line of credit or Mortgage.