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Fidelity 101
Commercial Surety & Fidelity
48
Insurance
Not Applicable
01/06/2012

Additional Insurance Flashcards

 


 

Cards

Term
A _____ is a three part agreement.
Definition
Surety Bond
Term
What are the three parts of a surety bond?
Definition

1. The Surety

2. The Obligee

3. The Principal

Term
Define Surety Bond
Definition
A surety bond is an agreement in writing that obligates the surety to hold itself responsible for the nonperformance of an expressed obligation and provides for compensation should there be a failure to perofrm specified acts/obligations within a stated period.
Term
A surety bond is purchased by the _______ for the ___________ benefit.
Definition

1. Principal

2. Obligee's

Term
What is 'Statute of Frauds'
Definition

In 1677 the English Parliament created the passage of the 'Statute of Frauds' which stated that an underlying contract "to answer for the debt, default or miscarriage of another person" would be held valid and binding only if in writing and signed.

 

*In a nut shell - They're saying if it isn't signed it's in the blind...not valid. *

Term
When did personal guarantees become important?
Definition

Personal guarantees became important as commerce, finance and industry developed and as legal processes became more exacting, the demand for something morestable, responsible and permanent than personal guarantees became important.

 

*In a nutshell - As the economy grew, those that were providing personal suretyship didn't have enough money to back the promise...aka potentially insolvent*

Term

What was the company called that began writing "formal" surety business in 1880?

 

*Mainly consisting of court and fiduciary bonds*

Definition
Fidelity and Casualty Company
Term
Why in 1894 did the federal goverment testify the economic unsoundness of personal surety and officially recognize corporate suretyship?
Definition

Because the Federal Government alone had $35,000,000 in uncollectible claims against insolvent individual bondsmen!

 

 

Term
When was the Surety Association of America formed?
Definition
1908
Term
What is the purpose of the SAA (Surety Association of America)?
Definition

-Develops rating plans

-Collects and analyzes statistical data

-Establishes standard forms of bonds and policies

-Lobbies on bahlf of its members for favorable legislation and bond forms. 

 

Term
Who is the Principal?
Definition

The one who is bonded.

 

 

Term
Give an example of a Principal.
Definition

- In a Public Official bond the principal is THE PUBLIC OFFICIAL

 

- In a Court of Fiduciaruy bond the principal is THE ADMINISTRATOR, EXECUTOR, OR GUARDIAN

 

-In a License and Permit bond the principal is the one to WHOM THE LICENSE IS ISSUED.

 

- In a Contract Bond the principal THE CONTRACTOR

Term
Who is the Surety?
Definition

The party who guarantees fulfillment of the principal's obligation to the obligee.

 

*In a nut shell - US! We provide a guarantee that our principal will perform/supply/satisfy the Obligee.

Term
Who is the Obligee?
Definition

The obligee is the 'third party', it is a person, firm, corporation, or government agency. 

 

The Obligee is the party PROTECTED by the bond.

 

They are usually the ones requiring the bond OF the principal.

Term
Suretyship
Definition

A risk transfer method whereby the obligee transfers his risk of the principal's default to the surety. 

 

Term
What are the 3 Benefits of Surety?
Definition

1. The obligee is assured that the contract will be fulfilled.

 

2. The principal is able to secure the work based on the backing of the surety.

 

3. The surety obtains a fee for their underwriting and surety backing.

Term
What exactly is the Surety Bond?
Definition
Instrument or document that the surety (or authorized agent) issues that guarantees or promises to a second party (the obligee) the successful performance of the third party (the principal).
Term
Who is the surety bond purchased by?
Definition
The principal.
Term
Who does the Surety Bond benefit?
Definition
The obligee.
Term
Bond Penalty
Definition

The maximum amount of the bond.

 

 

 

 

 

*The max. amount that the surety company is held liable for.*

Term
Indemnity
Definition
To indemnify or sign an agreement that stipulates that the principal will remiburse us should there be a loss under the bond.
Term
What exactly DOES the Indemnity Agreement do?
Definition
The indenity agreement helps secure the rights to reimbursement by the surety if a loss occures and we have to pay.  It hold the Surety company harmless of all loss and expense. 
Term
Collateral
Definition

Anything of value pledged to the surety to secure it against loss by reason of default of the principal.

 

 

Term
Subrogation
Definition

The legal process by which an insurance company seeks from the principal who has caused a loss and is paid under the bond to the obligee. 

 

*This is where the indemnity agreement comes into play.  They sign the agreement and give us rights to collect if they do not reimburse us*

Term
How does the Surety benefit from writing surety bonds?
Definition

- Profit the fee's charged

- Providing jobs and taxes to support the economy

Term
What's the difference between Insurance and Surety?
Definition

Insurance                Surety

     Two party agreement   Three party agreement

     Cancellable              Non-Cancellable

Losses included in premium    Premium is for "service fee"

 

Term
Suretyship resembles ______ more closely than it resembles insurance.
Definition
Banking
Term
How does suretyship resemble banking?
Definition

-Viewed as a credit extension

-No losses expected

-Premium charges is in effect a service fee

-Right to subrogate/salvage or draw on collateral.

Term
What does it mean to be 'Joint and several liability'?
Definition
This means that the obligee may seek recovery from either the principal or the surety, or from both.  Each party is equally liable for the entire obligation.
Term
Adverse Selection
Definition

- Not desirable from an underwriting perspective.

 

Examples

*State requiring a sales tax bond only when there is a pattern of late tax payments from the principal.

*A court will only require a probate bond for appointees who they are not comfortable or reside outside their territory.

*A bond is required only for a new business to the territory.

*A utility payment bond is an example where the utility company many only require new business to the servicing region, to posta  bond for payment of utilites.

Term
What are the Two main classes of surety bonds?
Definition

-Contract Bonds

-Non-contract Surety bonds

Term
Define Contract Bond
Definition
Guarantee the faithful performance of a construction contract.
Term
Define Non-contract surety bonds
Definition
All other surety bonds consist of non-contract.
Term
What is a License and Permit Bond?
Definition
-It's a bond required when the public interest demands regulation of certain types of businesses for the protection of citizens and property.
Term
What is an example of License and Permit Bond?
Definition

-Contractor

-Auctioneer

-Insurance Broker

-Motor Vehicle Dealer

-Alcoholic Beverage Retailer

Term
Define Judicial Court Bonds
Definition
Required of parties who desire an actionin a lawsuite.  The bond protects a party in litigation from possible loss suffered as a result of the court's graning a privilege to the other party.
Term
Give example of Judicial Court Bond
Definition

-Replevin

-Appeal

-Attachment

-Injunction

Term
What is a Replevin Court Bond?
Definition

-AKA Garnishment bond

-Filed by the plaintiff where they are asserting ownership to property in the hands of the defendant.  The plaintiff obtains posession of the property and the bond guaranties the plaintiff will return the property in the event that the court determines the plaintiff is not entitled to the property.

Term
Define Appeal Bond
Definition
An amount of money placed in holding while the appeal is being handled/decided.  Always posted by the losing party.
Term
Define an Injunction Bond
Definition
In which the plaintiff is held liable for damages in the event of a false injunction.  The objective of the bond is to protect the party who has been wrongfully accused by a plaintiff and suffers financial loss.
Term
Define Fiduciary Court Bond
Definition
A fiduciary court bond is required of fiduciaries or other entities named to a position of trust appointed by courts to administer funds. 
Term
Give examples of Fiduciary Court Bond
Definition

- Guardian/Conservator

-Executor/Administrator

-Receiver

-Trustee in Bankruptcy

Term
What is a Public Official Bond?
Definition
A Public Official Bond guarantees the faithful performance of duty by the public official who is in a position of trust, as well as an honest accounting of all public funds handled by the official.  The bond must comply with the statues and, for this reason, carries whatever liability the statues require.
Term
What is a Miscellaneous Indemnity Bond
Definition

-Lumped together in three groups:

1. Bonds required by the federal government.

2. Bonds required buy governmental bodies other than the federal government.

3. Bonds required by individuals, firms, corporations, associations, or other legal entities.

Term
What are some examples of Miscellaneous Bonds?
Definition

-Lost Instrument (Lost securities)

-Self Insurer Workers' Compensation

-Utility

-Payment Bond

-Union Indemnity/Welfare

-Airline Reporting Corporation

-Concessionaire

Term
What is a Federal Non Contract Bond?
Definition
These Bonds are a result of Federal Law or regulation enacted to protect various interests of U.S. Citizens.  Many of these regulatory requirements are purely economic such as tax obligations.
Term
What are some examples of Federal Non Contract Bonds?
Definition

-Medicare Bonds

-ICC Broker

-Custom

-Distilled Spirits

-Packers and Stockyard Act

-Grain Dealer

-Oil and Gas or Geothermal Lease

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