State laws have been enacted in recent years which restrict Principals from effecting cancellation or nonrenewal except under specified circumstances.
Providing the Surety a written notice that reasons the need for cancellation is helpful for determining if we are allowed by law to do so.
For example: In California, there is a state statute indicating the Cancellation Of Bond Or Withdrawal Of Sureties found in the Code of Civil Procedure Section 996.310-996.360, where it governs cancellation of or withdrawal of a Surety from a bond given other than in an action or proceeding.
There are four ways to cancel a bond:
- An Obligee submits a written letter of release stating that the bond can be canceled.
- The Surety and or Principal can refer a Notice of Cancellation terminating the bond for a particular date, for each term specified in the bond form, the underlying agreement, or the statute or regulation, as the case may be.
- The bond indicates an expiration date and automatically closes upon the expiration. This is referred to as a Term Bond.
- The Obligee returns the original bond to the Surety.
Cancellation provisions vary depending upon the bond type. The following highlights what a surety typically needs to cancel a bond:
Bid Bonds: The bid status is typically required to close out a bid bond.
Performance/Payment Bonds: When the Obligee requests a Consent of Surety to final payment, the obligation is considered completed, and the bond can be canceled. If this does not occur and the project is completed, require a release letter from the Obligee stating the project is complete, and the bond can be canceled. However, the bond may be subject to warranty guarantees that extend beyond completion of the contract.
Supply Bonds: Most sureties consider these as term obligations and will typically “non-renew” them at the end of the specified contract term.
*Note: Bonds that renew with a renewal bond or continuation certificate (i.e., bonds that are not continuous) are cancellable upon the return of the original bond, renewal bond or continuation certificate. In the absence of the original renewal document, send written verification from the Obligee (state, county, city, etc.) that the bond was not filed or used.
Financial Guarantee Bonds: A letter from the Obligee is required, and the bond returned unless the Surety sends a Notice of Cancellation on the bond. Some sureties require a signed acceptance by the Obligee before the bond can be canceled.
License & Permit Bonds: Either a letter from the Obligee or notification from the Principal stating that the bond is no longer needed is required. If notification is provided by the principal, the surety typically sends out a Notice of Cancellation to coincide with the cancellation provision of the bond.
Court Bonds: These bonds require a legal affidavit signed by the judge releasing the bond and preferably, if permitted, the return of the originally filed bond (not all courts will return the bond).
Public Official Bonds: These bonds are written to coincide with a term of office require a signed letter of release from an official of the jurisdiction. That official must have the proper authority to release the bond.
To put it simply, it should be noted that plenty of continuous bonds contain a cancellation clause which allows surety companies to send notice of cancellation or nonrenewal to the Obligee.
The Surety’s notice must comply with the terms of the cancellation clause and conform to any applicable state laws. As the Principal, you can typically determine if there is a cancellation clause by reading the bond form.
Some continuous bonds do not contain a cancellation clause so that the only way sureties can cancel them is upon receipt of a letter of release from the Obligee. The Obligee’s letter should state the principal’s name, bond number, and the date the liability is considered terminated.