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GLOSSARY

GLOSSARY of TERMS and DEFINITIONS

ACCOUNTING METHODS: For construction or building contractors, the two methods of accounting, both realistic and preferred by surety companies, are (a) the Completed Contract method, and (b) the Percentage-of-Completion method.

ADVANCE PAYMENT BOND: Guarantees repayment or liquidation by the principal of moneys advanced in connection with a construction or supply bond or other type of contract.

AGGREGATE LIABILITY CLAUSE: A clause in a third party license bond which limits the surety's liability to the bond penalty regardless of the number of claims made against the bond.

ALCOHOL BOND: A general term describing a bond given in compliance with federal or state laws or regulations governing the sale, manufacture or warehousing of alcohol for beverage or non-beverage purposes. Where the alcohol is intended for beverage purposes, the bond is frequently referred to as a liquor bond or intoxicating liquor bond.

ANNUAL BOND: One written to cover contractors or bids awarded or submitted during an annual period or for a period terminating within a fiscal year.

APPEAL BOND: One filed in court by a party against whom a judgment has been rendered, in order to stay execution of the judgment pending appeal to a higher court, in hope of reversing the judgment. The bond guarantees that the judgment will be paid if the appeal fails.

APPLICATION: A questionnaire which must be completed, when required, by an applicant for a bond. It gives the company information about the applicant and contains his/her agreement to indemnify the surety in the event of loss, as well as his/her promise to pay the premium.

ASSETS: The items on a balance sheet showing the book value of property owned. For a surety this could include all funds, property, securities, etc., or the property of an estate, whether real or personal.

ATTACHMENT BOND - PLAINTIFF'S: Attachment is taking a defendant's property into custody by a summary process from the court in advance of the trial on the merits of the case. It is taken as security for the payment of any judgment that may be recovered by the plaintiff in the action. Attachment is allowed only where the plaintiff alleges a statutory ground for it (e.g. defendant is a nonresident or is about to leave the jurisdiction or remove or conceal his/her property). The bond, which the plaintiff is required to furnish, provides for indemnity to the defendant against loss or damage in case it is finally decided that a statutory ground did not exist or the plaintiff fails to recover a judgment against the defendant.

ATTACHMENT - DEFENDANT'S BOND TO DISCHARGE OR RELEASE: When an attachment has been issued, a defendant may discharge the attachment by giving the bond conditioned for the payment of any judgment that may be rendered against him/her in the action, with interest and costs.

BID BOND: Given by a bidder for a supply or construction contract to guarantee that the bidder, if awarded the contract within the time stipulated, will enter into the contract and furnish the prescribed performance bond. Default will ordinarily result in liability for the difference between the amount of the principal's bid and the bid of the next low bidder who can qualify for the contract. In any event, however, the liability of the surety is limited to the bid bond penalty.

BLANKET FIDELITY BOND: A bond which covers loss of money, merchandise, or other property owned by the insured or in which he/she has a pecuniary interest, when such loss is due to dishonesty of his/her employees. All employees are covered under the bond unless specifically excluded.

COURT BONDS: A general term embracing all bonds and undertakings required of participants in a lawsuit permitting them to pursue certain remedies in the courts.

CUSTOMS BONDS: These bonds guarantee the payment of import duties and taxes, and compliance with regulations governing the entry of merchandise from foreign countries into the United States.

DEDUCTIBLE: An amount which is to be "deducted" from any loss and which the insured agrees to bear personally.

DEPOSIT PREMIUM: The advance premium required by a surety company on those forms of bonds which are subject to premium adjustment.

DISCOVERY BOND: A form of fidelity bond which covers against dishonest or fraudulent acts of employees, provided such loss is discovered any time after the bond becomes effective and before it is terminated, irrespective of when the dishonest or fraudulent acts were committed.

DISCOVERY PERIOD: Under certain bonds and policies, provision is made to give the insured a period of time after the cancellation of a contract in which to discover whether a loss was sustained that would have been recoverable had the contract remained in force. This period usually varies from six months to three years. The period may be determined by statute; in certain bonds, it is of indefinite duration because of statutory requirement.

DISHONESTY INSURANCE: A generic term describing fidelity bond coverage guaranteeing against loss caused by dishonest officers or employees of a commercial firm or by dishonest public officials or employees.

EFFECTIVE DATE: The date from which bond coverage is provided.

EXCLUSION: A provision in a bond referring to perils or property not covered.

EXECUTOR: One named in a will to distribute and settle the estate of the testator.

EXPIRATION: The date upon which a bond will cease to provide coverage unless previously cancelled.

FIDELITY BOND: A bond which will indemnify an insured for loss caused by a dishonest act or fraudulent act of an employee covered under the bond. Also known as dishonesty insurance.

FIDUCIARY: A person who occupies a position of trust, particularly one who manages the affairs or funds of another.

FIDUCIARY BOND: Required of administrators, executors, guardians, committees, etc., guaranteeing faithful performance of duty in accordance with the laws applicable to the trust. Frequently called a probate bond because the bond is customarily filed in a probate court.

FINANCIAL GUARANTEE BOND: A bond that guarantees payment of a sum of money whether or not the exact amount is known or stated. Common types are: court bonds (appeal, etc.), lease bonds which guarantee payment of rent, etc.

FINANCIAL STATEMENT: A balance sheet which the surety requires of an applicant for a bond (particularly a contractor), setting forth his/her financial position as of a given time or period.

FORFEITURE BOND: A bond where the full penalty is payable upon breach of the condition regardless of the amount of loss or damage.

GROSS LOSS: The amount of loss before giving effect to reinsurance. Usually reported inclusive of claim expenses. It may also be considered as the loss without allowance for collection of salvage.

GUARDIAN OR GENERAL GUARDIAN: A fiduciary appointed by the court to administer the estate of a minor.

HAZARD: A term applied to certain conditions which may create or increase the probability of a loss, because of a given peril.

HOLD-OVER PUBLIC OFFICIALS: Those who are elected or appointed to succeed themselves in office or who continue beyond the limits of their terms until their successors are appointed or elected.

IMMIGRANTS BOND: A class of federal bonds covering aliens who enter the United States legally.

INCOME TAX BONDS: These are given to guarantee payment of federal income taxes due or claimed to be due. They are direct financial guarantees and collateral usually is required.

INDEMNIFY: To compensate for actual direct loss sustained under a bond. There can be no recovery on a bond until the obligee has actually suffered a loss.

INDEMNITOR: One who enters into an agreement with a surety company to hold the surety harmless from any loss or expense it may sustain or incur on a bond issued on behalf of another.

INDEMNITY BOND: A general term describing any bond which protects the obligee against direct loss which may arise as a result of failure on the part of a principal to perform.

INDEMNITY TO SHERIFF OR MARSHAL: A sheriff or marshal, in the execution of the process of the courts, may incur liability for damage to a third party through an act or acts which turn out to be wrongful. Either official when requested to take some particular action, may require a bond of the party making the request. The bond covers the liability of the sheriff or marshal in that connection.

INDIVIDUAL FIDELITY BOND: A bond covering a single employee for a specified amount to protect the employer in the event of the employee's dishonesty.

INJUNCTION - PLAINTIFF'S BOND TO SECURE: An injunction is a judicial process whereby the defendant is required to do or refrain from performing a particular act. An order granting an injunction may be on the condition that the plaintiff furnish a bond to indemnify the defendant against loss in case it is decided that the injunction should not have been granted.

INJUNCTION - DEFENDANT'S BOND TO DISSOLVE: When an injunction has been issued, the court may order the injunction dissolved upon the giving of a bond. The bond guarantees payment the plaintiff may sustain as a result of the performance of the act or acts originally enjoined. It is then the privilege of the defendant to proceed as if the injunction had never been issued.

INSURING CLAUSE: That part of a bond or policy which recites the agreement of the insurer to protect the insured against some form of loss or damage. Also known as an insuring agreement.

INTESTATE: One who dies without a legal will.

INTERNAL REVENUE BONDS: A class of federal bonds which guarantee compliance of producers of distilled spirits, tobacco, etc., with applicable laws and regulations, as well as the payment of taxes.

JOINT VENTURE: A joining of the financial resources and skills of several contractors to undertake contracts of construction too large for their individual and separate abilities.

JUDICIAL BOND: A general term applied to all bonds filed in court.

LABOR AND MATERIAL BOND: A bond given by a contractor to guarantee payment for the labor and material used in the work which he/she is obligated to perform under the contract. This liability may be contained in the performance bond, in which case a separate labor and material bond (payment bond) is not given.

LIABILITY: This is a broad term denoting any legally enforceable obligation.

LIBEL - BOND TO DISCHARGE OR RELEASE: When a warrant for the seizure of a ship has been issued, the marshal is required to stay execution of the process, or discharge the ship if process has been levied, on receiving from the owner of the ship a bond or stipulation conditioned to comply with the decree of court in the action.

LICENSE BOND: Used interchangeably with the term "permit bond" to describe bonds required by state law, municipal ordinance or regulation, to be filed prior to the granting of a license to engage in a particular business or a permit to exercise a particular privilege. Such bonds provide payment to the obligee for loss or damage resulting from violations by the licensee of the duties and obligations imposed upon him/her.

LIEN: A charge upon real or personal property for the satisfaction of a debt.

LIMIT OF LIABILITY: The maximum amount which a surety company will pay in case of loss. Sometimes called the bond penalty.

LOSS RATIO: The percentage of losses to premiums.

LOST INSTRUMENT BOND: A bond given by the owner of a valuable security (stock, bond, promissory note, certified check, etc.) which is alleged to have been lost or destroyed. It protects the issuer of the security against loss which may result from the reinsurance of a duplicate or, in some instances, payment of cash value thereof.

MAINTENANCE BOND: The normal coverage provided by a maintenance bond is a guarantee against defective workmanship or materials. However, maintenance bonds sometimes incorporate an obligation guaranteeing "efficient or successful operation" or other obligations of like intent and purpose.

MISCELLANEOUS INDEMNITY BONDS: Bonds which do not fit any of the well recognized divisions or subdivisions.

NAME SCHEDULE BOND: A fidelity bond which covers the employees listed in a schedule, each for a specified amount.

OBLIGEE: The party in whose favor a bond runs; the party protected by the bond against loss. An obligee may be a person, firm, corporation, government, or an agency of a government.

OBLIGOR: Sometimes called the principal, or one bound by the obligation. Under a surety bond, both principal and surety are in a sense, obligors, since the surety must answer if the principal defaults.

REPLEVIN - PLAINTIFF'S BOND TO SECURE: Replevin is an action to recover possession of specific articles of personal property. The replevin bond, which the plaintiff is required to furnish, is conditioned for the return of the property, if return is ordered, and for the payment of all costs and damages adjudged to the defendant.

REPLEVIN - DEFENDANT'S BOND TO RECOVER PROPERTY REPLEVIED: Where personal property has been replevied, the defendant may, by the furnishing of a bond, regain possession of the property, pending final decision on the merits. The bond is conditioned for redelivery of property to the plaintiff, if ordered to do so, or otherwise to comply with a court order or judgment.

RETROACTIVE RESTORATION: A provision in a bond whereby, after payment of a loss, the original amount of coverage is automatically restored to take care of undiscovered losses as well as future losses.

RIDER: A printed form of special provision added to a bond. Sometimes called an endorsement.

STATUTORY BOND: A term generally used describing a bond given in compliance with a statute. Such a bond must carry whatever liability the statute imposes on the principal and the surety.

STAY OF EXECUTION: A bond to stay or suspend execution on a judgment. It guarantees the payment of the judgment upon termination of the stay.

SUBCONTRACT BOND: One required by a general contractor of a subcontractor, guaranteeing that the subcontractor will faithfully perform the subcontract in accordance with its terms and will pay for labor and material incurred in the prosecution of the subcontracted work.

SUBDIVISION BOND: Many municipalities provide by ordinance that a developer who undertakes to lay out a housing or industrial subdivision shall give bond with surety to guarantee that, within a specified time, improvements on the property, such as streets, sidewalks, curbs, gutters, and sewers will be constructed.

SUBROGATION: The legal or equitable process by which a surety company obtains from a third party recovery of an amount paid out by the surety to the obligee or a claimant under the bond.

SUPERSEDEAS BOND: This is a bond to supersede or take the place of a judgment, and coverage is substantially the same as under a defendant's appeal bond.

SUPERSEDED SURETYSHIP: When a company writes a bond to take the place of another bond which is cancelled on the effective date of the new bond, a rider is generally attached (unless the bond itself contains a superseded suretyship provision) agreeing to pay losses that would have been recoverable under the first bond except for the expiration of the discovery period.

SUPPLY BOND: A bond which guarantees faithful performance of a contract to furnish supplies or materials. In the event of a default by the supplier, the surety must indemnify the purchaser of the supplies against the loss occasioned thereby.

SURETY BOND: An agreement providing for monetary compensation should there be a failure to perform specified acts within a stated period.

SURETYSHIP: Refers to obligations to pay the debts of, or answer for, the default of another. It assumes a legal relationship based upon the contract in which one person (the surety) undertakes to answer to another (the obligee) for the debt, default, or miscarriage of a third person (the principal) resulting from the third person's failure to pay or perform as required by an underlying contract.

TERM: A period of time for which a bond is issued.

TRUSTEE: One named in a will or deed of trust to manage property for the benefit of another.

UNDERWRITER: An officer or employee of a surety company who has the responsibility for accepting risks.

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