Conceptin Specialty commercial coverages
Drill10 items
Surety bonds vs fidelity bonds
A surety bond has three parties: the principal who makes a promise, the obligee who is protected if it is broken, and the surety that guarantees it. A fidelity bond has two: an employer and the insurer that covers the employer against its own employees' dishonesty. Both sit with the other specialty lines on specialty commercial coverages.
Who owes whom
Surety bond vs fidelity bond
| Point | Surety bond | Fidelity bond |
|---|---|---|
| Parties | Three: principal, obligee, surety | Two: employer and insurer |
| Who is protected | The obligee | The employer |
| What it answers for | The principal's failure to perform or pay | Theft or dishonesty by the employer's own staff |
| Losses expected? | No; underwritten like credit | Yes; priced like insurance |
| Underwriting focus | The 3 Cs: character, capacity, capital | The employer's operations and controls |
| Where you find it today | Written as a bond | Employee theft agreement of the commercial crime form |
Fidelity coverage now sits in the employee theft insuring agreement of the ISO commercial crime forms (CR 00 20 and CR 00 21, 2022 edition); the rest of that form is on the commercial crime page.
Seat the parties first
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Before choosing a bond type, write P and O beside the two people in the stem: who must perform, and who is protected if they do not.
Notes on each optionCommit to an answer first. The notes under the item then open on every option: what rules it in or out, and the one word that splits the runner-up from the key.
- Item 01
Harry, a building contractor, posts a performance bond to win a city project. In this arrangement, who is the obligee?
- ASubcontractors are protected by a payment bond, not the obligee of a performance bond.
- BThe bonding company is the surety that guarantees Harry's performance.
- CCorrect: the city is the obligee, the party the performance bond protects.
- DHarry is the principal who promises to perform.
- Item 02
Which bond is a two-party arrangement that protects an employer against the dishonest acts of its own employees?
- AA performance bond is a three-party surety bond guaranteeing contract work.
- BA fiduciary bond sounds alike but guarantees a court-appointed executor or guardian.
- CCorrect: a fidelity bond is a two-party agreement protecting an employer from employee dishonesty.
- DA license and permit bond is a three-party surety bond guaranteeing compliance with laws.
- Item 03
A court appoints an executor to settle an estate and requires a bond guaranteeing that she will faithfully carry out her duties. This is a:
- ALitigation bonds, such as appeal or attachment bonds, guarantee obligations in a lawsuit.
- BA performance bond is a contract bond guaranteeing completion of work.
- CCorrect: a fiduciary (probate) bond guarantees that a court-appointed executor will faithfully perform her duties.
- DA public official bond covers elected or appointed officeholders, not executors.
- Item 04
A contractor wins a bid on a school project but refuses to sign the contract at its bid price. The school hires the next lowest bidder at a cost $50,000 higher. Which bond compensates the school?
- ACorrect: a bid bond guarantees the winning bidder will sign at its bid price, and the surety pays the difference if it does not.
- BA payment bond applies after a contract is signed and protects suppliers and subcontractors.
- CA maintenance bond guarantees completed work against defects.
- DA performance bond applies only after the contract is signed, which never happened here.
- Item 05
A county treasurer is required by law to post a bond guaranteeing faithful handling of public funds. This is a:
- AA license and permit bond guarantees compliance with laws tied to a license, not handling of public money.
- BA performance bond guarantees contract work.
- CCorrect: a public official bond guarantees that an officeholder will faithfully perform duties, including handling public funds.
- DA fiduciary bond covers court-appointed executors, guardians and trustees, not elected officials.
- Item 06
After finishing a parking lot, a paving contractor must guarantee the work against defective materials and workmanship for one year. Which bond provides this guarantee?
- AA bid bond guarantees that the winner signs the contract, not the quality of finished work.
- BA payment bond protects subcontractors and suppliers.
- CA performance bond guarantees completion of the contract, not defects after completion.
- DCorrect: a maintenance bond guarantees completed work against defective materials and workmanship for a set period.
- Item 07
Before issuing a permit, a city requires an electrician to post a bond guaranteeing that the work will comply with local building codes. This is a:
- AA contract performance bond guarantees a specific contract, not code compliance tied to a permit.
- BAn employee fidelity bond protects an employer from its own employees' dishonesty.
- CCorrect: a license and permit bond guarantees that the permit holder will comply with the governing laws and codes.
- DA public official bond covers officeholders, not licensed tradespeople.
- Item 08
A general contractor on a private office project fails to pay its lumber supplier. Which bond protects the supplier?
- ACorrect: a payment bond guarantees that the contractor pays its subcontractors, laborers and suppliers.
- BA maintenance bond guarantees completed work against defects.
- CA bid bond guarantees signing the contract at the bid price.
- DA performance bond guarantees completion of the work, not payment of suppliers.
- Item 09
A contractor defaults, and the surety pays $200,000 to have the project completed for the owner. What right does the surety have?
- AThe owner is the obligee the bond protects, so the surety cannot recover from it.
- BUnlike an insurer, a surety does not simply absorb the loss; it has a right of indemnity against the principal.
- CThe owner's property insurer has nothing to do with a contractor's default.
- DCorrect: the surety has a right of indemnity against the principal, so it recovers what it paid from the contractor.
- Item 10
How does a surety bond differ from an insurance policy?
- ACorrect: a surety expects no losses and can recover anything it pays from the principal, unlike an insurer.
- BPooling premiums to pay expected losses describes insurance, not suretyship.
- CA surety bond has three parties; the two-party arrangement is a fidelity bond.
- DThe surety guarantees the principal's performance to the obligee; it does not cover the principal's own property.
Bond types and the promise behind each
| Bond | Guarantees | Usual obligee |
|---|---|---|
| Bid | The low bidder signs the contract and posts the required bonds | Project owner |
| Performance | The work is completed as contracted | Project owner |
| Payment | Subcontractors and suppliers are paid, keeping liens off the owner's property | Project owner, for subs and suppliers |
| Maintenance | Finished work stays free of defects for a set period | Project owner |
| Supply | Contracted materials or goods are delivered | Buyer |
| License and permit | A licensee follows the rules tied to the license | Licensing government body |
| Public official | An officeholder performs public duties faithfully | Public body |
| Fiduciary (probate) | An executor, administrator, guardian or trustee handles assets honestly | Court, for the beneficiaries |
| Litigation (court) | A party pays what the court orders: appeal, attachment, injunction, bail | Court or opposing party |
Three reads for any bond item
Count the parties
Someone guaranteeing a third party's promise is suretyship. An employer protecting itself from its own staff is fidelity. Where three parties appear, fidelity is out.
Seat the principal and the obligee
The principal is whoever must act: bid, build, pay, account, obey. The obligee is whoever gets hurt if that person fails. Putting the contractor in the obligee seat reverses the bond.
Match the failure to the bond
When two contract bonds still fit, ask when the failure happened (before signing, during the work, after completion) and who was left short (the owner or a supplier); that pair of answers names the bond.
Bond questions with short answers
Can a surety cancel a bond once it is issued?
Usually not. Surety bonds are generally noncancelable, which is one reason the surety looks so closely at the principal's character, capacity and capital before it signs.
Who pays for a surety bond, and who benefits?
The principal buys it, usually because the obligee demands it: a project owner, a court or a licensing body. The obligee gets the protection, and the principal stays answerable to the surety for any claim paid.
Do federal construction projects need bonds?
Yes. Under the Miller Act, federal construction contracts above a dollar threshold set in federal law require both a performance bond and a payment bond.