GLOSSARY
Agent – One who solicits, negotiates, or sells surety bonds on behalf of a surety company.
Balance Sheet – A financial statement listing assets, liabilities and net worth.
Bid Bonds – An obligation undertaken by the bidder promising that the bidder will, if awarded the contract, enter into the contract and furnish the prescribed payment and performance bond within a specified period of time. A bid bond guarantees a contractor will enter into a contract at the amount bid and post the appropriate performance bonds. These bonds are used by owners to pre-qualify contractors submitting proposals on contracts. These bonds provide financial assurance that the bid has been submitted in good faith and that the contractor will enter into a contract at the price bid. The Bond Connection specializes in these bonds.
Bond Company – A company licensed in one or more states to write surety bonds. The U.S. Treasury Department maintains a list of surety companies that it has qualified to write surety bonds for U.S. Government projects. State licensed and regulated insurance companies dominate the marketplace of easily and regularly acceptable insurance companies. The surety bond company stands ready to facilitate performance and completion by: providing trained personnel to consult and solve problems; bringing in a completion contractor; paying subcontractors and suppliers, and arranging financial assistance for the contractor.
Click here for a list of surety bond companies The Bond Connection recommends, along with a link to the U.S. Treasury Department where contact information and current limitations on any bond company.
Broker – Individual or organization representing a contractor in soliciting, negotiating, or buying a surety bond and rendering services incidental to these functions. By law, a broker also may be allied with the surety company for certain purposes, such as the delivery of a bond or collection of payment. The Bond Connection is a broker
Capacity – A term that refers to the size of a bond which a surety is able to write.
Collateral – Assets a surety may require & retain to assure project performance.
Commercial Bonds – A general classification of bonds that refers to all bonds other than contract and performance bonds. Commercial bonds cover obligations typically required by law or regulation. Each bond is unique to the circumstances at hand.
Completion Bonds – Also frequently referred to as “Improvement Bonds’ and “Subdivision Bonds”, Completion Bonds are those where a private landowner/developer/etc guarantee that (usually nearly/adjacent) public property affected by required/desired improvements will be performed/upgraded in accordance with applicable building codes per legal requirements. Such improvements include curbs and gutters, sidewalks, utilities, grading, storm drains, and streets. The obligation may not expire until all improvements are both completed and accepted. (Similar, in general nature, to Film Completion Bonds)
Contract Bonds – A type of bond designed to guarantee the performance of obligations under a contract. These bonds guarantee the obligee that the principal will perform according to the terms of a written contract. Construction contracts constitute most of these bonds. Contract bonds protect a project owner by guaranteeing a contractor’s performance and payment for labor and materials. Because the contractor must meet the surety company’s pre-qualification standards, construction lenders are also indirectly assured that the project will proceed in accordance with the terms of the contract.
Contractor(Principal) – The contractor who agrees to carry out the terms of a contract for the obligee (project owner).
Contractual Liability – Liability assumed under a written contract.
Court Bonds – A general term referring to bonds required in some action of law.
Damages – Term that refers to monetary measures of harm that may have occurred in a claim.
Defendant – The term that refers to the person or institution being accused in a court case.
Defendant Bonds – Defendant bonds counteract the effect of the bond that the plaintiff has furnished. These bonds are more hazardous than plaintiff bonds. Often they require the posting of collateral to be written.
Discover Period – Under certain surety bonds, the time allowed to discover, after the termination of the bond, that a loss has occurred. The terminated bond covers the loss if it is discovered during the specified time period.
Environmental Remediation Contract – A broad class of construction contracts covering remediation of environmental damage.
Fidelity Bonds – Bonds designed to guarantee honesty. Generally, the bond guarantees the honesty of employees. These bonds cover losses arising from employee dishonesty and indemnify the principal for losses caused by the dishonest actions of its employees.
Fiduciary – A corporation, person or other entity who occupies a position of trust; especially one who manages another’s affairs. One who is appointed to act in the best interests of another. A fiduciary is a person appointed by the court to handle the affairs of persons who are not able to do so themselves. Fiduciaries are often requested to furnish a bond to guarantee faithful performance of their duties.
Fiduciary Bonds – Bonds that guarantee an honest accounting and faithful performance of duties by administrators, trustees, guardians, executors, and other fiduciaries. Fiduciary bonds, in some cases referred to as probate bonds, are required by statutes, courts, or legal documents for the protection of those on whose behalf a fiduciary acts. They are needed under a variety of circumstances, including the administration of an estate and the management of affairs of a trust or a ward.
Funds Control – A method of taking control of a contract bond to ensure subcontractors and suppliers will be paid appropriately. This method may be used when the contractor would not otherwise qualify for a bond.
Heard Act – An 1894 federal act requiring surety bonding of federal public works programs; later expanded by the Miller Act of 1935.
Improvement Bonds – Frequently also referred to as both “Completion Bonds” and “Subdivision Bonds”, Improvement bonds are those where a private landowner guarantees (nearby/adjacent) public property affected by required/desired improvements will be upgraded in accordance with applicable building codes & government requirements. Such improvements are frequently things like curbs and gutters, sidewalks, utilities, grading, storm drains, and streets. The obligation may not expire until all improvements are both completed and accepted.
Indemnification – The act of guaranteeing another, repayment in the event of a loss.
Indemnity Agreement – Agreement by which one party agrees to indemnify a second party for losses suffered by the second party.
Individual Bonds – A term generally used with public official bonds, which refers to bonds written in the name of the specific public official.
Insurance – A two-party risk-transfer mechanism through which one party pays to have another party protect it from certain well-defined risks. Suretyship, in contrast, is a three-party relationship akin to that of a credit transaction in which no money changes hands until a default occurs or a problem arises.
Letter of Credit – There are many types of letters of credit. The type used to guarantee a contractor’s performance is a “standby” letter of credit in which a bank stands ready to pay over the amount of the letter to the owner of the project (obligee) in the event of default. A letter of credit differs significantly from a surety bond and one is not a substitute for the other. The Miller Act which applies to federal construction recognizes this fact and does not permit the use of a letter of credit to guarantee the performance of such contracts.
License and Permit Bonds – A term used to refer to bonds, which are required to obtain a license or a permit in any city, county, or state. These bonds guarantee whatever the underlying statute, state law, municipal ordinance, or regulation requires. They may be required for a number of reasons, for example, the payment of certain taxes and fees and providing consumer protection as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.
Maintenance Bonds – Bonds that provide for the upkeep of the project for a specified period of time after the project is completed. These bonds guarantee against defective workmanship or materials. These bonds may occasionally include a guarantee of “efficient or successful operation” or other obligations.
Miscellaneous Bonds – A term used to refer to bonds that do not fit any of the other well-recognized categories of surety bonds.
Miller Acts – A 1935 statute mandating surety bonds on all federal public works contracts in excess of $100,000. State and local public works projects are protected by “Little Miller Acts.”
Mortgage Broker Bonds – Compliance Bond to maintain a license, serves to regulate, eliminate fraudulent or unqualified participants.
Name Schedule Bonds – A type of public official or fidelity bond that lists the specific names and amounts of each named individual bonded. Name schedule bonds use one bond, but attach a schedule of individual names of the bonded public officials. Each name will list a specific dollar amount for which that individual is being bonded. These may be used to bond a panel of city council members or a similar body of officials.
Name Schedule Public Official Bonds – Name schedule bonds use one bond, but attach a schedule of individual names of public officials being bonded. Each name will list a specific dollar amount for which that individual is being bonded. These may be used to bond a panel of city council members or a similar body of officials.
Non-compliance – Failure to obtain surety bonding for a public project. Board members of public entities have been held personally responsible for losses resulting from defaults by contractors who should have been covered by surety bonds.
Notary Public Bonds – Include bonds that are required by statutes to protect against losses resulting from the improper actions of notaries.
Obligee – Usually the construction project owner. (The City of Orange or the State of California are examples). Surety bonds are guarantees to the obligee, the primary beneficiary of the surety bond that the surety company will fulfill the contractor’s performance of the contract and payment of certain labor and material bills. In a subcontractor’s bond, the general contractor is usually the obligee. The entity, corporation, person, or institution to which a surety guarantees that a principal performs as expected is the obligee.
Payment Bonds – Protects the owner/obligee by assuring payment for labor(s) and materials associated with the project. Payment bonds guarantee payment of the contractor’s obligation under the contract for subcontractors, laborers, and materials suppliers associated with the project. Since liens may not be placed on public jobs, the payment bond may be the only protection for those supplying labor or materials to a public job. The Bond Connection specializes in these bonds.
Penalty – A term used to refer to the monetary size or limit of a bond.
Performance Bonds – Protects the owner/obligee from financial loss caused by the contractor’s failure to complete the project according to the terms of a governing contract, agreement &/or purchase order. It guarantees payment of such things as the cost of completion or the cost to correct deficiencies, which are the responsibility of the contractor. These bonds frequently include a payment bond (also known as a labor and materials bond) and sometimes also a maintenance bond obligation. This protects the owner from financial loss should the contractor fail to perform the contract in accordance with its terms and conditions. THE BOND CONNECTION specializes in these bonds.
Plaintiff – The person or institution that brings an action in a court of law.
Plaintiff Bonds – Plaintiff bonds are required of a plaintiff in an action of law. They generally guarantee damages to the defendant caused by the plaintiff’s legal action, should the court decide for the plaintiff.
Premium – The amount of money or payment required in exchange for a surety bond.
Pre-qualification – A rigorous review performed by the surety to certify that a contractor is capable of performing the work in accordance with the terms and conditions of the contract.
Principal – The contractor who agrees to carry out the terms of a contract for the obligee (project owner).
Private Sector Contractors – Contractor firms operating under some form of private (non-governmental) ownership. Private-sector contractors perform most of the construction work in the United States.
Producer – The agent/broker responsible for writing the surety bond.
Rates – The amount of money per thousand dollars (or percentage) used to determine the bond premium.
Reclamation Bonds – A bond that guarantees that an institution will restore land, that it has mined or otherwise altered, to its original condition.
Replevin – An action of a law used to recover specific personal property.
Reinsurance – Insurance that involves acceptance by one insurer, called the reinsurer, of all or a part of the exposures covered by another insurer.
Risk – Possibility of loss or exposure to loss. Probability or chance of loss. Peril which may cause loss.
Risk Control – All methods of reducing the frequency and/or severity of losses including exposure avoidance, loss prevention, and loss reduction.
Site Improvement Bonds – Also frequently referred to as “Completion Bonds”, “Improvement Bonds” and “Subdivision Bonds”. Site Improvement Bonds are those needed when a landowner/developer/etc guarantees that (nearby/adjacent) public property affected by private (desired/required) improvements will be upgraded in accordance with applicable building codes & government requirements. Such improvements include curbs and gutters, sidewalks, utilities, grading, storm drains, and streets. The obligation may not expire until all improvements are both completed and accepted
Subdivision/Improvement Bonds – See “Site Improvement Bonds” (above). The only difference of significance is improvements are made property nearby/adjacent to new structures.
Supply Bonds – Bonds that guarantee the performance of a contract to furnish supplies or materials. In the event of a default by the supplier, the surety indemnifies the purchaser of the supplies against the resulting loss.
Surety – A company licensed in one or more states to write surety bonds. The U.S. Treasury Department maintains a list of surety companies that it has qualified to write surety bonds for U.S. Government projects. The surety stands ready to facilitate completion by: providing trained personnel to consult and solve problems; bringing in a completion contractor; paying subcontractors and suppliers and arranging financial assistance for the contractor. Individuals can also act as surety for another, however severe limitations exist. Not recommended.
Surety Agency – Insurance agencies and brokerage firms that arrange corporate surety bonding and insurance for contractors. The Bond Connection is a surety agency.
Surety Bonds – An agreement guaranteeing that a principal will carry out the contractual obligations the principal has agreed to perform or, alternatively, to compensate the other parties to the contract for losses resulting from the principal’s failure to perform. Under many surety bonds, the principal is a contractor. Surety bonds are three-party agreements in which the issuer of the bond (the surety) joins with the second party (the principal) in guaranteeing to a third party (the obligee) the fulfillment of an obligation on the part of the principal. An obligee is the party (person, corporation, or government agency) to whom a bond is given. The obligee is also the party protected by the bond against loss.
Surety Bond Company – A company licensed in one or more states to write surety bonds. The U.S. Treasury Department maintains a list of surety companies that it has qualified to write surety bonds for U.S. Government projects. The surety stands ready to facilitate completion by: providing trained personnel to consult and solve problems; bringing in a completion contractor; paying subcontractors and suppliers and arranging financial assistance for the contractor.
Click here for a list of surety bond companies THE BOND Connection recommends, along with a link to the U.S. Treasury Department where contact information and current limitations on any bond company.
Surety Bonding – The process of pre-qualifying the contractor (principal) and guaranteeing to the project owner (obligee) that the contractor will fulfill the contract’s terms and conditions and pay subcontractors and suppliers.
Surety Credit – Contractors qualify for surety credit following an analysis of their financial statements, integrity and abilities by the surety underwriter.
Surety Industry – The surety industry is composed of contract surety business and commercial surety business. The products comprising each are sold through the same type of distribution system — agents and brokers.
Surety Underwriter – An employee of the surety company who evaluates applications for surety bonds and determines the terms under which the applicant will be bonded.
Suretyship – An extension of credit without funds being dispersed (unless there is a default by the contractor principal on the bonds.) The surety is the third party to whom an owner (obligee) can turn if a contractor fails or cannot perform its obligations.
Treasury Listing – A financial rating published by the federal government that lists the maximum size of federal bond a surety is allowed to write.
Click here for contact information or to check the current limitation on any bond company.
Trustee – A trustee is a person named to manage a business’s assets and work with the business creditors.
Work-On-Hand Reports – A portion of a financial statement, a schedule that lists a contractor’s jobs in progress, those that are incomplete.
Note: This glossary describes common usage of surety industry terms as they apply, especially in the construction industry, and does not attempt legal interpretations. Consult an attorney, an insurance dictionary, or an industry professional for a more accurate and thorough description. The Bond Connection assumes or accepts no liability or responsibility for any user’s reliance on this information.