Specialty Bonds

Surety bonds are a type of financial guarantee that are used to protect against potential losses or damages caused by a particular individual or business. These bonds are typically required by government agencies, municipalities, and other organizations as a way to ensure that a certain level of performance or responsibility is met by the individual or business in question.

There are many different types of surety bonds, each of which serves a specific purpose. One of the most common types of surety bonds is a performance bond, which is required by government agencies and municipalities as a way to ensure that a contractor will complete a project according to the terms of their contract. These bonds typically require the contractor to provide a guarantee that they will complete the project on time and within budget, and that they will be liable for any damages or losses caused by their failure to do so.

Another common type of surety bond is a payment bond, which is often required by construction companies and other businesses that are involved in large-scale projects. These bonds ensure that the contractor will pay all of the bills and expenses associated with the project, and that they will be liable for any damages or losses caused by their failure to do so.

A third type of surety bond is a license bond, which is often required by government agencies and municipalities as a way to ensure that a particular business or individual is operating in compliance with all local laws and regulations. These bonds typically require the business or individual to provide a guarantee that they will comply with all local laws and regulations, and that they will be liable for any damages or losses caused by their failure to do so.

In addition to these common types of surety bonds, there are also many other types of bonds that are used for specific purposes. For example, a public official bond is often required by government officials as a way to ensure that they will perform their duties in a responsible and ethical manner, while a fiduciary bond is often required by financial institutions and other businesses that handle large sums of money.

Overall, surety bonds are an important tool that are used to protect against potential losses and damages caused by individuals and businesses. Whether you are a government agency, municipality, or private business, it is important to understand the different types of surety bonds that are available, and to choose the bond that is best suited for your particular needs.

Contractors that work on public projects are required to provide surety bonds. Carriers that specialize in insuring asbestos and/or lead abatement contractors have expanded into the field of surety bonds for these contractors because they understand their exposures.

The Excess Bank Employee Dishonesty Bond provides high limits bankers blanket bond coverage. This bond is written over Financial Institution Bond-Standard Form No. 24's underlying limits. The excess bond protects banks against catastrophic employee dishonesty losses. The standardized excess blanket bond is Excess Bank Employee Dishonesty Bond-Standard Form No. 28. There is no specific formula to determine adequate limits for a given financial institution, but one guideline used is average deposits value.

The United States Customs Bureau requires that an importer secure a bond to guarantee that it will pay all duties on goods brought into the country. Shippers must secure open customs bonds that cover shipments on a continuous basis. Custom bonds are available for others on a single shipment basis that are written for amounts equal to the value of the goods and include applicable duties and fees. Related to customs bonds, Non-Vessel Owners Common Carrier (NVOCC) bonds and freight forwarders bonds for importers and exporters are required by the Federal Maritime Commission and protect exporters for their cargoes while being shipped.

Bid and performance bonds for contractors engaged in pollution cleanup and other environmental work are available from specialty insurers. These bonds supplement the pollution liability, commercial general liability, and auto liability coverages available to these contractors. Surety limits are provided on a per-job basis and can be substantial.

The Environmental Protection Agency (EPA) establishes requirements for owners and operators of non-hazardous waste landfills that require bonds. These bonds are written by surety companies that specialize in them and other miscellaneous bonds. The bond program for non-hazardous waste landfills is designed for municipal solid waste landfills and demolition facilities. The financial responsibility may be accomplished through bonding, insurance, letters of credit, or trusts. The terms of the bond require that the operator continue to monitor the ground cover and ground water and maintain the landfill for 30 years after it is closed. This bond guarantees that the operator will perform such monitoring and required maintenance.

Certain types of surety bonds that do not easily fall into natural and well-defined classifications are considered more difficult to place than normal bond classes. These are classified as miscellaneous bonds and collateral is required when they are written. Because of the frequency of use and the amount of premium volume, lost instrument or lost securities bonds are the most familiar of the class. Other types of miscellaneous bonds given special treatment by surety markets are income tax bonds, which are given to guarantee payment of federal income taxes due; subdivision bonds that guarantee that certain property improvements, such as streets, sidewalks, and sewers, will be constructed by a subdivision developer; bonds that guarantee the performance or long life of a certain product or service such as long-term guarantees of roofs and roofing materials; patent infringement bonds; blue-sky bonds; self-insurance bonds; and numerous other "once-in-a-lifetime" specialty bonds that require individual underwriting judgment.

It can be difficult to find bond markets willing to write coverage on contractors just starting in business. A number of programs are available for contractors that have less than $500,000 in annual revenue. Coverage is available for performance, payment, and bid bonds for a variety of small and artisan contractors. Sureties examine the contractor's stability as well as its financial management. After a few jobs are completed successfully and without default, these risks improve substantially and the account can grow with the agent, who usually also writes the contractor's commercial general liability and commercial auto lines of business.

Third-party fidelity insurance coverage is available to a variety of contractors that make regular service calls to homes and businesses. Examples are air conditioning and heating services, appliance and television repair services, burglar alarm installation businesses, maid and janitorial services, pest control services, and detective and security guard services. Computer service providers are also eligible for this coverage because their employees have access to their clients' computers. This crime coverage protects both the service provider and the customer from losses due to dishonest acts that the service provider's employees commit.

Special bonds are required of organizations that choose to self-insure their workers compensation exposures. They must apply to the state's Workers Compensation Board, register to be a self-insurer, and post a bond that guarantees that claims will be paid.

Following are some examples of Specialty Bonds claims and the corresponding insurance coverages that can help pay for them:

Example 1: Performance Bonds

Performance bonds are a type of specialty bond often required in construction contracts to ensure that the contractor will fulfill their obligations as outlined in the contract. Suppose a contractor fails to complete a project as agreed, resulting in a claim from the project owner. The specialty bond, in this case, the performance bond, will help cover the costs incurred to complete the project, either by hiring a new contractor or compensating for the delays and financial losses.

Example 2: Fidelity Bonds

Fidelity bonds are used to protect businesses from losses caused by employee dishonesty, such as theft, embezzlement, or fraud. Let's say an employee defrauds the company, resulting in significant financial loss. A fidelity bond claim can be filed, and the bond can provide compensation for the losses incurred due to the fraudulent activity. This can help the business recover and ensure continuity in operations.

Example 3: Bid Bonds

Bid bonds are commonly used in the construction industry to ensure that contractors submit serious bid proposals. Suppose a contractor wins a bid but then backs out or fails to initiate the project as planned. In such a situation, the project owner can make a claim on the bid bond. The bond can then pay the difference between the original contractor's bid and the next lowest bid, compensating for the additional costs incurred in hiring another contractor.

Example 4: License and Permit Bonds

License and permit bonds are required by certain federal, state, or municipal governments as a precondition to receiving a license or permit to engage in certain business activities. These bonds ensure that the businesses comply with laws and regulations. Suppose a company violates regulations, causing harm to a customer or the public. The injured party can file a claim against the company's bond. If the claim is validated, the bond can pay for the damages up to its limit, providing financial relief to the injured party.

Example 5: Payment Bonds

Payment bonds are often used in construction projects to ensure that subcontractors and suppliers get paid even if the contractor runs into financial difficulty. If a contractor fails to pay subcontractors or suppliers, a claim can be made on the payment bond. The bond can then provide the funds needed to compensate these parties, ensuring they receive the payment they are due for their services or materials.