History. Individual Surety Bonds are the original form of suretyship. The earliest known record of a contract of suretyship is a Mesopotamian tablet written around 2750 BC. There is evidence of Individual Surety Bonds in the Code of Hammurabi and in Babylon, Persia, Assyria, Rome, Carthage, the ancient Hebrews and later England.
The Code of Hammurabi, written around 1790 BC, was the first time suretyship was addressed in a written legal code. It wasn’t until 1837 that the first Corporate Surety was organized, The Guarantee Society of London. In 1865, the Fidelity Insurance Company became the first US Corporate Surety company, but the venture soon failed.
Most all bonds are insurance policies and as such are governed by the various state Departments of Insurance (SDOIs).
Watch insurance expert Bill Hager speak on surety bond issues.
Surety Bond. A Surety Bond is an agreement subject to the Bond Form. The Surety Bond is usually required for monetary compensation for failure to perform specified acts referenced in the Bond Form. A Surety Bond is a generic name for all bonds. Surety Bonds are usually required by the state or Federal Government; these bonds are sometimes called License and Permit Bonds.
Along these same lines, there are three parts of a Surety Bond, the first is the Obligee. The Obligee is the entity requiring the Bond. The second of three parties is the Principal. The Principal is the person who will perform the contractual obligations set forth in the Bond Form. The third part is the Surety Company, which is the entity who will be insuring the Bond.
A surety bond is a promise to pay one party (the obligee) a certain amount if a second party (the principal) fails to meet some obligation, such as fulfilling the terms of a contract. The surety bond protects the obligee against losses resulting from the principal’s failure to meet the obligation.
The surety – who assures the obligee that the principal can perform the task.
The principal will pay a premium (usually annually) in exchange for the bonding company’s financial strength to extend surety credit. In the event of a claim, the surety will investigate it. If it turns out to be a valid claim, the surety will pay it and then turn to the principal for reimbursement of the amount paid on the claim and any legal fees incurred.
A key term in nearly every surety bond is the penal sum. This is a specified amount of money which is the maximum amount that the surety will be required to pay in the event of the principal’s default. This allows the surety to assess the risk involved in giving the bond; the premium charged is determined accordingly.
Annual U.S. surety bond premiums are approximately $3.5 billion. State insurance commissioners are responsible for regulating corporate surety activities within their jurisdictions. The commissioners also license and regulate brokers or agents who sell the bonds.
Motor Vehicle Dealer Bonds are a bond required of state or local government as a condition precedent to an entity or person obtaining a license to sell cars. The bond arrangement can be collateralized or non-collateralized, thereby precluding allocation of working capital, in a non-interest bearing account with a surety company.
Maintenance bonds (guarantee that a contractor will provide facility repair and upkeep for a specified period of time). There are also miscellaneous contract bonds that do not fall within the categories above, the most common of which are subdivision and supply bonds.
Commercial bonds represent the broad range of bond types that do not fit the classification of contract. They are generally divided into four sub-types: license and permit, court, public official, and miscellaneous.
Health spa bonds, which assure that a health spa will comply with local laws relating to their field, as well as refund dues for any prepaid services in the event the spa closes.
Court Bonds. Court bonds are those bonds prescribed by statue and relate to the courts. They are further broken down into judicial bonds and fiduciary bonds. Judicial bonds arise out of litigation and are posted by parties seeking court remedies or defending against legal actions seeking court remedies. Fiduciary, or probate, bonds are filed in probate courts and courts that exercise equitable jurisdiction; they guarantee that persons whom such courts have entrusted with the care of others’ property will perform their specified duties faithfully.
Public Official Bonds. Public official bonds guarantee the honesty and faithful performance of those people who are elected or appointed to positions in government. Examples of officials sometimes requiring bonds include: notaries public, treasurers, commissioners, judges, town clerks, and law enforcement officers.
Fidelity Bonds. Fidelity bonds, also known as employee dishonesty coverage, cover theft of an employer’s property by its own employees. Though referred to as bonds, fidelity coverage functions as a traditional insurance policy rather than a surety bond.
Regulatory. My expertise as to bonds is as follows: I am a former Commissioner of Insurance (Iowa), First Deputy Commissioner of Insurance and Assistant Attorney General assigned on a full time basis to the Department of Insurance (Iowa). In those capacities, on a daily basis, I had full regulatory oversight and responsibility for and I dealt directly with bond insurers and their policies and their obligations to parties to the bond and their good faith duties and their relationship with the parties to the bond.
Beyond Regulation. In addition to my regulatory background, I have served or am serving in the following capacities, each of which included daily knowledge of and interaction with bond insurers and their obligations: (i) General Counsel and Chief Lobbyist for the American Academy of Actuaries, (ii) Chief of Staff at the U.S. House of Representatives, (iii) President and Chief Executive Officer of the National Council on Compensation Insurance (“NCCI”), a major U.S. property casualty insurance entity doing business in some 40 states including California, (iv) elected Member of the Florida House of Representatives (formerly) where I serve as a Member and Vice Chairman of the Insurance Committee (among other committees), which has legislative oversight over all insurance operations in the state (as administered by the Florida Office of Insurance Regulation) including those relating to bond insurance and related claims, (v) nationally certified Reinsurance Arbitrator (ARIAS-US), where I sit as an arbitrator on disputes between (among others) bond insurers and their reinsurers, (vi) attorney admitted to practice in Florida, Illinois and Iowa (all upon examination) with an insurance practice and (vii) past Member of the Executive Committee of the National Association of Insurance Commissioners (“NAIC”).
Given all of this, set out below is my background specific as to bond insurance and related bond insurer obligations and responsibilities and parallel obligations of the parties to a bond.
1. Expertise as to Bond Insurance Policies (commonly known simply as a “bond”).
A. Bond Insurance Policy Expertise as an Insurance Regulator. I have had extensive and substantive experience relating directly to bond insurance policies including interpreting bond policy language and determining the bond insurer’s obligations under such policies. (Generally, a bond is simply a specialized insurance policy and is regulated throughout the U.S. by U.S. Insurance Regulators in a manner parallel to that of traditional insurance policies. As such, reference throughout to “policy” or “policies” is concurrent reference to “bond” or “bonds.”) As a regulator for eight years in three positions ((i) Assistant Attorney General assigned to the Department of Insurance (Iowa), (ii) First Deputy Commissioner of Insurance and (iii) Commissioner of Insurance), along with my staff, I approved (or disapproved) of the language of bond insurance policies used by each of the 1,000 property casualty insurance companies doing business in the state. (Many but not all property casualty insurers issue/issued bonds. As such, reference throughout to property casualty insurers is concurrent reference to those property casualty insurers that issue/ issued bonds. When I use the term insurer here, I am usually referring to bond insurers. Similarly when I use the term “property casualty insurers” I am usually referring to those property casualty insurers who issue bonds.) This regulatory action also included the approval of policy application forms. In addition, I regularly served as an Administrative Law Judge (then known as a “Hearing Officer”) in matters relating directly to bond insurance policies.
“ … is to monitor and respond to problems associated with the products, delivery and cost in the property/casualty insurance market [inclusive of bonds] and the surplus lines market as they operate with respect to individual persons and businesses. The Committee also is to monitor and respond to problems associated with financial reporting matters for property/casualty insurers that are of interest to regulatory actuaries and analysts and to monitor and respond to problems associated with the financial aspects of the surplus lines market.
C. Bond Insurance Policy Expertise: American Academy of Actuaries. Along these same lines, I served as general counsel and chief lobbyist to the American Academy of Actuaries, Washington D.C. The Academy is the national professional association for actuaries. These professionals establish premium levels for policies, including bond policies. In addition, because bond policy language dictates premium levels, actuaries are also active in determining policy language.
D. Bond Insurance Policy Expertise: CEO of A Major US Insurance Entity. After serving as a regulator, I served as President and Chief Executive Officer for the National Council on Compensation Insurance (“NCCI”), New York City, a nationwide industry owned organization with about 1,500 employees with annual revenues of about $150 million that did (and does) business in about 40 states. NCCI was domiciled in Florida, doing business throughout the US.
This means while CEO, NCCI was subject to the full authority of each state Department of Insurance (“SDOIs”) throughout the US and subject as well to the Insurance Codes of each such state as well as the jurisdiction of their state and federal courts.
Among my responsibilities at NCCI was (together with my staff) to formulate all workers compensation insurance policy forms as used in our 40 states of operation. This work included drafting all policy language (tailored to the specific state’s insurance code) as well as drafting all endorsements and all other policy forms. In addition, my responsibilities included gaining state insurance department approval of all such policy forms as a condition precedent to their use as submitted by some 600 insurance companies. Finally, I note that among others, the life insurance benefit under workers compensation is an important coverage. I am very familiar with the meaning and relevance of specific state approval of policy forms, endorsements and applications and related documents and matters, including those related to bonds.
E. Bond Insurance Policy Expertise: Reinsurance Arbitrator. I am also one of about 400+ certified reinsurance arbitrators (by ARIAS-US) and have sat as an arbitrator on bond insurance issues in disputes about policy language between reinsurers and their insurers.
2. Expertise as to Duties of Bond Insurance Companies.
1. Bonds: NAIC Market Regulation Handbook. As Commissioner, I had as an available tool, the NAIC Market Regulation Handbook (“Examiners Handbook” or “Handbook”). Among other things, this Handbook sets forth standards to assess bond insurer behavior relating to (i) policy application, (ii) policy issuance and (iii) responsibilities relating to their agents. The Handbook also sets forth standards of review as to agent contracts and appointments by insurers of agents. The Handbook is used by every department of insurance in the United States. The standards have been universally agreed to by all of the nation’s Commissioners of Insurance as adopted formally by them through the NAIC. The standards of the Handbook are universally recognized as appropriate standards against which to judge bond insurer behavior.
2. Bonds: Market Conduct Examinations. On a regular basis, my regulatory agency conducted Market Conduct Examinations of bond insurers utilizing the Examiners Handbook to determine whether in fact the target insurer was meeting all of their obligations to their insureds and others. This action entailed physically going into the insurers’ application and policy issuance files to determine any errant action or inappropriate policy behavior. As further discussed below, errant insurers were warned, disciplined and prosecuted as required.
3. Bonds: NAIC Financial Examiners Handbook. As Commissioner, I had available another tool, namely the NAIC Financial Examiners Handbook (“Financial Examiners Handbook”). Among other things, the Financial Examiners Handbook sets forth standards to assess bond insurer solvency on a triennial basis. Among other documents reviewed by examiners in reaching financial conclusions are agent contracts and policyholder matters. As with the Market Conduct Examiners Handbook, the Financial Examiners Handbook is used by every department of insurance in the United States. Similarly, these standards have been universally agreed to by all of the nation’s Commissioners of Insurance as adopted formally by them through the NAIC. The standards of the Financial Examiners Handbook are universally recognized as appropriate standards against which to judge bond insurer behavior.
4. Bonds: Examinations. On a regular basis, my Department conducted financial examinations of bond insurers utilizing the Financial Examiners Handbook to determine whether in fact the insurer was and was likely to remain solvent. As with market conduct exams, financial examinations entailed physically going into the insurers’ operations and studying, among others, files to (i) assure compliance with agent and policyholder duties and (ii) to assure that financial reporting as to agent and policyholder matters were properly carried out. As further discussed below, errant insurers were warned, disciplined and prosecuted as required.
5. Bonds: Complaints from the Public. On a daily basis, my Department received incoming consumer complaints as to bond insurance company practices. This Consumer Protection Division was staffed by Department lawyers who resolved the individual complaint and also, equally important, those lawyers also determined whether a bond insurer evidenced unacceptable practices — that is to say, whether the incoming consumer complaints in fact constituted a red flag as to the bond insurance company’s potential behavior across the board.
6. Bonds: Prosecution. To the extent insurer behavior required formal action (whether as a result of complaints from the public or as a result of Department investigation through a Market Conduct Examination or the Financial Examination), my Department prosecuted such bond insurers under the state’s civil Administrative Procedures Act. In connection with such prosecutions, I served in various capacities during my eight years as a regulator, including serving as (i) prosecutor (as Assistant Attorney General), (ii) as the decision maker as to whether to initiate prosecution in the first instance (while First Deputy and Commissioner of Insurance) and (iii) as the Administrative Law Judge (“ALJ”) who presided over the prosecution and entered findings of fact and conclusions of law as to insurer coverage determinations and claim settlement practices. I have served as an ALJ in scores of such cases where the bond insurer’s (i) agent, (ii) policy form, (iii) policy application and (iv) overall conduct were the primary issues and I entered final decisions and orders in such matters.
B. Expertise as to Duties of Bond Insurance Companies as an Insurance Industry Executive: CEO of a Major US Insurance Organization. I discuss my executive experience at NCCI under this section because in addition to expertise as to policies (discussed above), my experience at NCCI also resulted in expertise as to insurer responsibilities as to applications, policy issuance and their agents.
While I was President and CEO, NCCI was subject to the full range of authority of the SDOIs as discussed above. I am very familiar with the duties of admitted insurers relating to their obligations and responsibilities and the regulatory scheme in place in such states as to such matters.
While President and CEO of NCCI, I visited and physically toured and reviewed in excess of 400 insurance companies and gained direct exposure to the procedures and processes and standard industry practices of the U.S. insurance community including the bond insurance community in that any number of those insurers had bond insurance operations.
C. Expertise as to Duties of Bond Insurance Companies: General Counsel to the American Academy of Actuaries.As stated above, I served as General Counsel and Director of Government Relations for the American Academy of Actuaries. I mention it again here in connection with insurer agent and policy obligations because Academy members included affiliation with virtually every bond insurance company in America. Among other things, such actuaries had duties relating to policy language and policy pricing. The Academy’s Board of Directors was likewise made up of leading insurance company executives from such bond insurance companies.
D. Expertise as to Duties of Bond Insurance Companies: Attorney in Private Practice Iowa. As an attorney in private practice, I represented a number of agent and insurer interests and became familiar with applicable bond industry standards of practice, including insurer responsibilities toward their agents. Those interests also included intimate involvement with insurance forms as counsel to the (i) Professional Insurance Agents of Iowa and (ii) the Iowa Association of Life Underwriters (life, health and annuity insurance agents).
3. Expertise as to Bond Insurance Underwriting.
A. Expertise as to Underwriting Duties and Responsibilities of Bond Insurance Companies As Commissioner of Insurance. Consistent with the discussion immediately above, I have also had significant experience and responsibility in connection with determining and passing judgment on bond insurance companies’ underwriting duties and responsibilities.
1. Underwriting: NAIC Market Regulation Handbook. As Commissioner, consistent with the prior discussion, I also utilized the NAIC Examiners Handbook in that it sets forth standards to assess the underwriting behavior of bond insurance companies relating to (i) underwriting during the policy application process, (ii) underwriting during the time of policy issuance, (iii) underwriting responsibilities relating to the insurance company’s agents and (iv) underwriting matters that arise subsequent to policy issuance, for example during claim settlement time. As discussed above, the standards are utilized by every state department of insurance and the standards of the Examiners Handbook are universally recognized as appropriate standards against which to judge the underwriting duties and responsibilities of bond insurance companies.
2. Underwriting: Market Conduct Examinations. Also as discussed above, on a regular basis, Market Conduct Examinations of bond insurers were conducted utilizing the Examiners Handbook to determine whether in fact the target insurer was meeting all of their obligations to their insureds and others as to underwriting issues. This action entailed physically going into the insurers’ application and policy issuance files to determine any errant action or inappropriate underwriting behavior. As further discussed below, errant insurers were warned, disciplined and prosecuted as required.
3. Underwriting: NAIC Financial Examiners Handbook. As above, I had available another tool, namely the Financial Examiners Handbook, which (parallel to the above discussion) sets forth standards to assess bond insurer solvency on a triennial basis. Among other documents reviewed by examiners in reaching financial conclusions are bond insurer underwriting files and matters. These standards have been universally agreed to by all of the nation’s Commissioners of Insurance as adopted formally by them through the NAIC and are universally recognized as appropriate standards against which to judge bond insurer behavior, including underwriting.
4. Underwriting: Financial Examinations. As above, my Department conducted financial examinations of bond insurers utilizing the Financial Examiners Handbook to determine, as with market conduct exams, among others things, (i) assurance of compliance underwriting duties and (ii) assurance that financial reporting matters were properly carried out. As further discussed below (and above), errant insurers were warned, disciplined and prosecuted as required.
5. Underwriting: Complaints From the Public. On a daily basis, my Department received incoming consumer complaints as to underwriting practices of bond insurance companies. This Consumer Protection Division was staffed by Department lawyers who resolved the individual complaint and also, equally important, those same lawyers also were trained to determine whether an insurer evidenced unacceptable practices — that is to say, whether the incoming consumer complaints in fact constituted a red flag as to an insurance company’s potential underwriting behavior across the board.
NCCI authored and maintained a detailed, word-by-word, phrase by phrase description as to each of these 600 classification codes, as to which insurers were required to adhere. That entire intense underwriting process inclusive of its classifications is encompassed in an industry wide recognized and used document called the Scopes Manual and is recognized as the Gold Standard for underwriting workers compensation insurance. Furthermore, the underwriting process, regardless of the line of insurance is fundamentally the same. This is because most all insurers (including bond insurers) are about the business in the underwriting process of selecting the most favorable risks and rejecting the least favorable risks, regardless of the line of insurance. As such, it is the same process brought to bear on different lines of insurance – always with the same goal: identifying good risks and rejecting bad risks.
C. Expertise as to the Underwriting Duties of Bond Insurance Companies: General Counsel to the American Academy of Actuaries. I served as General Counsel and Director of Government Relations for the American Academy of Actuaries. Academy members included affiliation with virtually every insurance company in America. Among other things, such actuaries had duties relating to the underwriting duties and responsibilities of insurance companies. The Academy’s Board of Directors was likewise made up of leading insurance company executives from such insurance companies.
D. Expertise as to the Underwriting Duties and Responsibilities of Bond Insurance Companies: Attorney in Private Practice Iowa. As an attorney in private practice, I represented a number of insurer interests and became familiar with applicable bond industry standards of practice, including insurer responsibilities toward the underwriting process, including working directly with the Iowa Association of Life Underwriters (whose duties included among others, the first line of life underwriting).
4. Expertise as to Bond Insurance Agents.
A. Expertise as to Insurance Agents as a Regulator: Licensure. I have had extensive and substantive experience relating directly to the duty of care that comes to bear on bond insurance agents and agencies in their various relationships with bond insurance companies. As an Assistant Attorney General (see above), I have prosecuted bond insurance agents for violations relating to their duty of care. As an insurance regulator (see above), along with my staff, I have screened hundreds of thousands of agents for character and background (separate and apart from subject matter testing). As to subject matter, I have formulated agent-licensing exams in the first instance. Upon passage of the exam, I have licensed hundreds of thousands of insurance agents.
B. Expertise as to Insurance Agents as a Regulator: Prosecution and CE. I have had full responsibility for continuing education for licensed bond insurance agents (approving CE courses in the first instance for acceptable content; overseeing the administration of such courses and granting and denying credit for such courses). I have initiated agent revocation actions and prosecuted those actions to completion.
C. Expertise as to Insurance Agents as a Regulator: ALJ. I have sat as the Administrative Law Judge in such actions and entered findings of facts and conclusions of law in scores of cases in which agents were prosecuted for violations relating to standards of care in connection with bond insurance matters and I have had direct responsibility for the appointment process by bond insurance companies (some 1,000 life insurance companies) of all of their life agents. I have supervised as well the ongoing relationship of all bond insurance companies in the state with all of their appointed agents.
D. Expertise as to Bond Insurance Agents: Legal Representation. As a lawyer, I have defended bond insurance agents and brokers against allegations (in administrative law forums) of violations of their duty of care.
E. Expertise as to bond Insurance Agents: Industry CEO. As President and Chief Executive Officer of a major Florida domiciled and licensed insurance entity (NCCI) doing business in some 40 states, I have had substantial working relationships with the U.S. insurance agent and agency community.
5. Expertise as to Bond Actuarial Issues.
A. Bonds Expertise – Actuarial Issues as a Regulator. As Insurance Commissioner, my agency was responsible for solvency oversight, insurance company examinations and financial and accounting matters of bond insurance companies. In particular, that oversight included the responsibility of overseeing practices of insurers, agents and actuaries who formulated their rates. In addition, I oversaw the state regulation of the securities industry with Iowa’s Superintendent of Securities reporting directly to me.
B. Bond: Expertise as to Actuarial Issues as CEO. During my tenure as CEO, NCCI had (and continues to have) responsibility to accurately price and file pricing for some $12 – $15 billion of workers compensation insurance in 39 states throughout the U.S. NCCI prepared proposed premium filings for regulators to approve by extracting key data from its 600 member insurance companies and then used that data to project necessary premium changes. NCCI carried out its intense pricing work though the professional efforts of an actuarial division of about 150 personnel. These individuals included support staff; statisticians; actuarial students and qualified actuaries. This staff produced about 40 major rate filings annual covering 40 states, pricing some $12 to $15 billion of insurance (workers compensation); and included the responsibility to advocate those rate changes before state government.
C. Expertise as to Actuarial Issues: American Academy of Actuaries. I served as General Counsel and Director of Government Relations for the American Academy of Actuaries, including advising on admissions, discipline, federal antitrust, and general corporate law. I represented the 10,000-member professional organization before Congress (e.g., Senate Committees on Banking, Commerce, Finance and Labor, and House committees on Education, Labor, Energy, and Ways and Means) and the various federal regulatory agencies. The Academy is the professional organization of actuaries and includes qualified actuaries from all disciplines and all forms of insurers. Academy members included affiliation with virtually every property casualty insurance company and actuarial consulting company in America. The Academy’s Board of Directors was likewise made up of leading insurance company executives from such companies.
E. Bonds: Actuarial Issues as an Arbitrator. I am certified by ARIAS as one of about 400 U.S. certified reinsurance arbitrators and sit as an arbitrator on disputes between insurers and their reinsurers; actuarial issues routinely arise in such disputes in the form of pricing disputes including information (and mis-information) supplied by the ceding company and that information’s (and mis-information’s) positive or adverse effect on the pricing that was agreed to at the time of the initial reinsurance agreement.