In our last post, we talked about the various types of surety bonds that exist. Now that you know the types of surety bonds, we are going to discuss onerous provisions that may be present in certain bond forms. As an underwriter and an agent, it is important to review the language of each bond as well as the underlying statute or contract to make sure that you are aware of what you are bonding. The terms and provisions below are in alphabetical order. Each should be treated with equal amounts of importance.
Adverse Selection: Adverse Selection arises when an obligee mandates a bond requirement for principals who fail to meet specific criteria, such as minimum net worth, business tenure, or certain credit benchmarks. To identify adverse selection, an underwriter or agent typically examines the relevant statute or contract that mandates the bond.
Aggregate Liability Clause: An aggregate liability clause restricts the Surety’s liability to the bond penalty, irrespective of the number of claims filed against the bond. Without the aggregate clause, the bond becomes susceptible to multiple claims, each potentially demanding the full bond liability.
Cancellation Clause: The absence of a cancellation clause precludes the surety from terminating its future liability under the bond. It is crucial to pay attention to cancellation terms. Most terms allow for cancellations with a 60-day notice period, while some necessitate 90 days or more for cancellation.
Confession of Judgment Wording: This term enables the obligee to confess judgment against your company, obligating your company to pay the claimed amount without the ability to dispute the judgment.
Discovery Period: The obligee may define a timeframe within which they can file claims against the bond after its cancellation or discharge. A lengthier period elevates the risk for the surety. The discovery period might not be explicitly stated in the bond but could be included in the underlying statute or contract. Note that while a bond form might extend the time allowed to file a lawsuit under a bond, it cannot reduce the time stipulated under a statute.
Forfeiture Clause: This provision grants the obligee the right to demand the entire bond penalty, irrespective of the actual loss’s size. Regarded as one of the most burdensome provisions a bond form might contain, it often necessitates collateral as part of the underwriting process.
Liability in Excess of Bond Penal Sum: This refers to language that includes covered amounts such as court and legal fees, in addition to the penal sum of the bond.
Sole Discretion: This term empowers the obligee to make sole determinations on an issue, thereby diminishing the surety’s ability to handle and mitigate a claim.
Stacking / Cumulative Liability: This occurs when a bond has a specific expiration date, requiring a new bond to be filed for each successive term. Each bond carries a new bond penalty, effectively “stacking” the liability for each term. It is imperative to be mindful of this clause and underwrite the principal during each renewal term.
Third Party Guarantee: This provision grants third parties the right to make claims against the bond, thereby increasing the surety’s liability and potentially resulting in minor nuisance claims.
If you have any questions about certain provisions within bond forms or statutes, please feel free to contact Lexington National.