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Surety Bond Glossary

Below is a comprehensive list of technical terms utilized in the surety bond industry.

Surety Bond Term
Acceleration: Acceleration occurs when the contractor is compelled by the owner to complete the project ahead of schedule. But, it comes at a price to the owner. Changes in contract time, whether delay or acceleration, increase the contractor’s cost and often become the subject of a claim.
Acceleration clause: A clause in a contract that states that if a payment is missed, or some other default occurs (such as the debtor becoming insolvent), then the contract is fully due immediately. This is a typical clause in a loan contract; miss one payment and the agreement to pay at regular intervals is voided and the entire amount becomes due and payable immediately.
Account current: An account current is the billing statement an insurance company sends to its producer.
Accounts Receivable Turnover: Measures the internal collection efficiency and potential bad debt exposure. The calculation is: Acct. Rec. X 360 /Annual Revenue. Sureties are looking for a figure of 60 days or less.
Act of god: An event that is caused solely by the effect of nature or natural causes and without any interference by humans whatsoever. Insurance contracts often exclude “acts of God” from the list of insurable occurrences as a means to waive their obligations for damage caused by hurricanes, floods or earthquakes, all examples of “acts of God”.
Actual damages: Penalty or compensation for losses that can readily be proven to have occurred and for which the injured party has the right to be compensated. In a contract, damages are usually stated as either liquidated damages, actual damages or consequential damages. For example, a contractor has been hired to build a casino. If there is a delay and liquidated damages has been assessed, it is usually stated in dollars/day so the contractor might have to pay, for example, $500 for every day the project is delayed. With actual damages, for every day that the project has been delayed, the owner will be awarded damages based on actual cost that the owner can verify. For example, because the casino has been delayed for 1 week, the owner still has to pay the rent, the employee wages and utility bills, etc, the contractor will have to pay damages totaling those costs. With consequential damages, the contractor will be liable to the owner for the damages as a consequence of the delay. For example, because the casino has not open for 1 week, as a consequence, the casino has lost out on 1 week’s worth of revenue, which potentially could be millions of dollars.
Addendum: (also known as an addenda) Written information adding to, clarifying or modifying the bidding documents. An addendum is generally issued by the owner to the contractor during the bidding process and as such, addenda are intended to become part of the contract documents when the construction contract is executed.
Additional Insured: A person, company or entity protected by an insurance policy in addition to the insured.
Adjudication: This term is most frequently encountered in the construction industry in the U.K. Adjudication is a binding decision made by an appointed neutral, often a quantity surveyor, either by deciding on the basis of submitted documents, or as is increasingly the case, after a hearing. It is designed to provide a speedy, if not always elegant, resolution to enable work to continue on site without interruption. Either party may appeal the adjudicator’s decision to court or arbitration, or indeed settle the dispute by mediation. The Housing, Grants, Regeneration Act 1996 in the United Kingdom has greatly increased the use of adjudication.
Adjuster: A person who investigates and settles losses for an insurance carrier. In the surety industry, those persons are more often referred to as claims representatives, claims attorneys, or consultants.
Administered Arbitration: The parties select an agency (for-profit or not-for-profit) which serves as an intermediary between parties and the arbitrator (like a “middle-man”). The agency’s fees are in addition to the arbitrator’s.
Administrator: A fiduciary appointed by the probate court in the absence of a will, to manage or distribute the assets of an estate and pay all just claims and debts.
Administrator, Cum Testamento Annexo or With Will Annexed: One appointed by a probate court to administer the estate where the deceased left a will but failed to name an executor or the one named as executor fails to qualify.
Administrator, Cum Testamento Annexo, De Bonis Non: One appointed by a probate court to succeed an executor who has died, resigned or been discharged before the administration is complete.
Administrator De Bonis Non: One appointed by a probate court to succeed an administrator who has died, resigned or been discharged before the administration is complete.
Administrator Pendente Lite: One appointed to preserve the assets of a decedent’s estate where there is a contest of the will or other circumstances which delay qualification of an executor if there is a will, or the appointment of an administrator if there is no will.
Administrator, Special: Same as Administrator Pendente Lite.
Administrator, Temporary: Same as Administrator Pendente Lite.
Admiralty Court: Special courts which deal with matters pertaining to the sea. They have their own procedures, rules, etc. which differ from those in ordinary courts.
Admiralty Company: An insurance or surety company licensed to do business in a given state.
Admitted Carrier: A company doing business, under a Certificate of Authority.
ADR: Also known as “Alternative Dispute Resolution”; methods by which legal conflicts and disputes are resolved privately and other than through litigation in the public courts, usually through one of two forms: mediation or arbitration. It typically involves a process much less formal than the traditional court process and includes the appointment of a third party to preside over a hearing between the parties. The advantages of ADR are speed and money: it costs less and is quicker than court litigation. ADR forums are also private.
ADR Rider to Bond: While contracting parties in the construction process have been moving towards alternative disputes resolution processes for many years, the surety industry has traditionally favored litigation as the means of resolving its disputes. Increasingly, sureties are embracing mediation and other techniques to avoid and resolve disputes. The Dallas Fort Worth Airport Capital Development Plan’s Subcontractor Master Surety Program marked one of the first efforts to provide a pre-default agreement by sureties to use ADR procedures. The ADR rider to the performance bonds on that project utilize step negotiation, facilitation and a non-binding advisory opinion by a third party neutral in the event of a dispute over the propriety of a subcontractor termination.
Advance Payment Bond: Guarantees repayment or liquidation by the principal of monies advanced in connection with a construction or supply bond or other type of contract.
Adverse Selection: This occurs when an obligee enforces a bond requirement for principals who do not meet certain credit standards of the obligee. The standards could be a minimum net worth, a clean credit history or “X” years in the business.
Advisory Opinion: A non binding statement by an arbitrator, facilitator, mediator, or project neutral of its interpretation of the facts and law on a matter submitted for that purpose. Federal Courts are constitutionally prohibited from issuing advisory opinions by the case or controversy requirement.
AGC Surety Bond Committee: One of the standing committees of the Associated General Contractors of America, this committee works closely with the Surety Association of America and the National Association of Surety Bond Producers to develop policy on such issues as directed suretyship, bond forms, and alternative default insurance products.
Agent: The authorized representative of an insurance company or companies.
Agent of Record: an individual who has a contractual agreement with an insured/principal. The agent of record has a legal right to commissions from the risk.
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 either Federal or State laws or regulations governing the sale, manufacture, or warehousing of alcohol. The bond frequently is referred to as a Liquor Bond.
Aleatory: A type of contract. The term is usually applied to insurance contracts in which payment is dependent on the occurrence of a contingent event, such as injury to the insured person in an accident or fire damage to his insured building.
All-Risk: An insurance policy which endeavors to cover any loss or damage to an insured property unless such loss is specifically excluded by the policy language.
Alternate Bid: Amount stated in the bid to be added or deducted from the base bid amount proposed for alternate materials and/or methods of construction.
Alternative Dispute Resolution: Also known as “ADR”; methods by which legal conflicts and disputes are resolved privately and other than through litigation in the public courts, usually through one of two forms: mediation or arbitration. It typically involves a process much less formal than the traditional court process and includes the appointment of a third party to preside over a hearing between the parties. The advantages of ADR are speed and money: it costs less and is quicker than court litigation. ADR forums are also private.
American Arbitration Association: The largest full-service ADR provider in the U.S. The American Arbitration Association assists in the design and implementation of ADR systems for corporations, unions, government agencies, law firms and the courts. Administers mediation, arbitration, and dispute review boards.
American Insurance Association: The American Insurance Association (“AIA”) is the leading property and casualty insurance trade organization, representing more than 370 insurers that write more than $77 billion in premiums each year. AIA member companies offer all types of property and casualty insurance including fidelity and surety, personal and commercial auto insurance, commercial property and liability coverage for small businesses, workers’ compensation, homeowners’ insurance, medical malpractice coverage, and product liability insurance. AIA’s roots go back more than 130 years to the establishment of the National Board of Fire Underwriters in 1866. In 1964, the old American Insurance Association merged with the National Board and the Association of Casualty and Surety Companies and became the present-day AIA.
Annual Accounting: This term relates to Fiduciary Bonds. An annual accounting is a presentation of an estates activity over a year term. Depending on the jurisdiction, a fiduciary may be required to file such a document with the court. As a surety, we require copies of the court accepted document to ensure that the fiduciary is complying with court requirements and that no obvious problems are developing with the estate.
Annual Bond: One written to cover contracts 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 defendant, against whom a judgment has been rendered, in order to stay execution of the judgment pending appeal to a higher court, in the hope of reversing the judgment.
Appellant: One pleading review of a court decision.
Appleton Law: Regulation named after a former Superintendent of Insurance of New York State, and instituted in the early 1900’s. The law was amended in 1989 after the failure of several banks which provided credit during the financing boom of the 1980’s. The repayment of many of these credit risks were guaranteed by surety bonds in the form of financial guarantees. Consequently, the state of New York passed an amendment which restricts the writing of “financial guarantee insurance” to those companies set up to write coverage only in New York State, ie. monoline carriers. Since the definition of “financial guarantee insurance” is somewhat vague, many insurance companies have elected not to write bonds that may be carry potential promissory note guarantees. Some examples include retro premium payment, large deductible, and depository bonds.
Application: A questionnaire giving required information concerning one who requests a bond written in his/her behalf. The questionnaire describes the nature of the bond and contains the applicant’s promise to pay and to indemnify the surety in case of default.
Application for Payment: Contractor’s written request for payment for completed portions of the work and, for materials delivered or stored and properly labeled for the respective project.
Appointment: The instrument providing documentation certifying a company’s desire that an agent represent that company in the sale of insurance or surety products. An agent may be appointed by any number of companies legally doing business in the Texas, but must be sponsored at all times by at least one company to maintain an active license to sell insurance.
Arbitration: An alternative dispute resolution method by which an independent, neutral third person (“arbitrator”) is appointed to hear and consider the merits of the dispute and renders a final and binding decision called an award. The process is similar to the litigation process as it involves adjudication, except that the parties choose their arbitrator(s) and the manner in which the arbitration will proceed.
Arbitration Agreement or Arbitration Clause: A contract by two or more individuals or entities to submit a particular dispute that has arisen or disputes that may arise in the future to arbitration rather than to court. Such an agreement usually specifies the binding nature of the arbitration, that any arbitrator’s decision may be enforced in court, and whether the arbitration proceedings will be confidential.
Arbitrator: An arbitrator is independent and impartial and is selected by the parties or on their behalf (by the Institute or by another appointing authority) on the basis of their arbitral/technical expertise, reputation and experience in the field of activity from which the dispute stems.
As-Built Drawings: (also known as Record Drawings) Contract drawings marked up to reflect changes made during the construction process. It is good practice to make As-Built drawings by marking the changes on reproducible drawings such a sepias for the duplication purposes later.
Assets: Assets include all funds, property, securities, etc. Also the property of an estate — real or personal.
Association of Attorney Mediators: AAM is a nonprofit trade association of qualified, independent attorney-mediators. Members of AAM must meet qualifications and ethical standards which meet or exceed state or Federal requirements for mediators. AAM’s role in the mediation process is to help potential users of mediation services find the attorney-mediator best suited to assist the parties in resolving their dispute. AAM fulfills its mission through a National Office located in Dallas, Texas. As a trade association, AAM promotes the use of mediation and protects the mediation process. AAM conducts seminars for attorneys, assists the Judiciary in drafting and implementing local rules and procedures for mediation; submits amicus briefs to the Courts on selected issues involving mediation; and monitors legislation concerning the mediation process.
Association of Independent Sureties: This is the association for the many small and mid-sized surety companies in the United States.
Assign: To transfer an interest.
Assignment: The document transferring an interest.
Attachment Bond-Plaintiff’s: Attachment is the taking into custody of a defendant’s property by a summary process from the court, in advance of the trial on the merits of the case, 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 non-resident or is about to leave the jurisdiction or remove or conceal his 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 in fact exist or the plaintiff fails to recover a judgment against the defendant.
Attachment: Legally taking a defendant’s property.
Attachment-Defendant’s Bond to Discharge or Release: When an attachment has been issued, a defendant may discharge the attachment by giving bond conditioned for the payment of any judgment that may be rendered against him in the action, with interest and coasts.
Attestation: The act of watching someone sign a legal document, such as a will or power of attorney, and then signing your own name as a witness. When you witness a document in this way, you are attesting — that is, stating and confirming — that the person whom you watched sign the document in fact did so. Attesting to a document does not mean that you are vouching for its accuracy or truthfulness. You are only acknowledging that you watched it being signed by the person whose name is on the signature line.
Attorney-in-Fact: One who holds a Power of Attorney granted by a surety company empowering the execution of a surety bond.
Attorney Work Product Privilege: A rule that protects materials prepared by a lawyer in preparation for trial from being seen and used by the adversary during discovery or trial.
Attorney’s Fees: The usual and ordinary meaning of the words “attorney’s fees” is the consideration that a litigant pays or becomes liable to pay in exchange for legal representation.
Attorney-Client Privilege: A rule that keeps communications between an attorney and her client confidential and bars them from being used as evidence in a trial, or even being seen by the opposing party during discovery.
Audit: An examination and verification of financial books and records.
Audited Statement: The report of the public accountant after having examined and verified the books and records to an extent sufficient to certify to their accuracy.
Authenticity, Bond: Obligees should always verify the authenticity of surety bonds they are being asked to accept. The most reliable way to authenticate a surety bond is to contact the issuing surety company directly. However, it is often difficult to ascertain the correct address, telephone number or person to contact at the surety. The Surety Association of America has published a guide that contains a list of surety companies together with information as to how they can be contacted for the purposes of authenticating a bond.
Authority, Agent’s Apparent: Authority of an agent that is created when the agent oversteps actual authority, and when inaction by the surety or insurance company does nothing to counter the public impression that such authority exists.
Authority, Agent’s Express: Express authority is exemplified by the agent’s agency agreement which is kept on file by the agent and sponsoring company. It is also exemplified in the power of attorney granting the agent power and authority to take certain acts or bind the company to specified obligations.
Authority, Agent’s Implied: Although certain functions an agent may perform are not set out in the express authority documentation (agency agreement or power of attorney), the routine performance of these may lead the public to reasonably believe the agent has been given express authority where none exists.
Award: The decision of an arbitrator or other non-judge in a dispute submitted to him or her.
Back Charge: Billings for work performed or costs incurred by one party that, in accordance with the agreement, should have been performed or incurred by the party to whom billed. Owners bill back charges to general contractors, and general contractors bill back charges to subcontractors. Examples of back charges include charges for cleanup work or to repair something damaged by another subcontractor, such as a tub chip or broken window.
Balance Sheet Financial: Statement of assets, liabilities and net worth.
Bail Bond: One given by an accused or convicted of violation of a law or ordinance in order to secure his release or liberty, guaranteeing that he will appear in court at the time set for trial.
Bank Confirmation Letter: An agreement whereby one financial institution guarantees (confirms) a letter of credit of another financial institution. The Hartford usually requires that all letters of credit issued by small or foreign banks be confirmed.
Bankruptcy Trustee Bonds: Provides to the beneficiaries of the bankruptcy a guarantee that bonded trustees, named in a bankruptcy proceeding, will act following court rulings. Common types of bankruptcies are: * Chapter 7: Liquidates a business by selling assets to pay debts. * Chapter 11: Allows for the business to reorganize itself and pay debts.
Beneficiary: A person who is entitled, by law or bond language, to claim against a bond even though not specifically named as an Obligee.
Bid Bond: Given by a bidder for a supply or construction contract to guarantee that the bidder, if awarded into contract within the time stipulate, 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.
Bid Listing: A procurement system in which a general contractor must submit with its bid the names of the subcontractors they intend to use if awarded the contract.
Bid Shopping: A practice by which contractors, both before and after their bids are submitted, attempt to obtain prices from potential subcontractors and material suppliers that are lower than the contractors’ original estimates on which their bids are based, or after a contract is awarded, seek to induce subcontractors to reduce the subcontract price included in the bid.
Bills Paid Affidavit: An affidavit executed by a contractor or subcontractor in connection with interim or final payments wherein the contractor or subcontractor states, under oath, that it has either paid all of its bills on a project, or that that it has paid all bills for work performed during previous draw periods and that it will pay all bills associated with the payment to be made in reliance on the affidavit. While the affidavit does not relieve the recipient from responsibility for claims that may be filed if the affidavit is not truthful, the person signing the affidavit faces potential civil and criminal sanctions for filing a false affidavit.
Blanket Bonds : Guarantees the honesty of all an organization’s employees.
Blanket Position Bonds : Guarantees the honesty of a list of employees.
Blanket Public Official Bonds: Guarantees all public employees of a public organization.
Blanket Position Public Official Bond :Guarantees the honesty of a list of public employees of a public organization.
Blocked Accounts: This term relates to Fiduciary Bonds. It is an established account of estate assets that a fiduciary does not have access to without a court order.
Blue Sky Bonds: In many states, there are laws regulating the sale of securities, known as Blue Sky Laws, designed to prohibit the sale within the state of worthless securities. A bond is required of securities dealers to indemnify purchases of securities from the dealer against loss in event of false representations, as an inducement to purchase.
Bond: An instrument designed chiefly to guarantee the integrity and honesty of the principal; his/her ability, financial responsibility, and compliance with the law or contract. It is a guarantee of performance. Bonds are written by the surety on behalf of the principal to ensure satisfaction by the obligee.
Bond Penalty: See Penal Amount
Bonding Around a Lien: The process of posting a bond to indemnify a property owner, title company, or lender from liability for a filed mechanic’s lien is known as “bonding around.” The process may take the form of statutory bond to release a recorded lien, or a common law obligation to indemnify parties who rely on such a bond.
Bonus-Penalty Clause: A positive/negative incentive to comply with a schedule. A bonus is paid for timely performance; a penalty is assessed for untimely performance. The dollar amount of the bonus and penalty must be equal.
Book of Business: The number, size and type of accounts that an agent services, and upon which he earns commissions.
Bordereau: A report, listing the risks reinsured, that the ceding company regularly provides to the reinsurer. This report typically includes the insured’s name, premium basis, premium and the amount of coverage.
Broad Form Property Coverage including Completed Operations: A coverage extension that is of great value to the general contractor as respects “completed operations” property damage liability claims. Without it, the normal Comprehensive General Liability policy will not respond for “completed operations” claims (i.e., claims arising out of work performed on behalf of the insured by subcontractors). With this coverage extension, this exposure is covered. Additional broadening coverage features are also included, but none as important as the above to the general contractor.
Broker: Individual or organization representing a contractor in soliciting, negotiating or buying a surety bond and rendering services incidental to these functions. No such designation exists under Texas Insurance Licensing Law, and while the term usually connotes someone who primarily represents the insured or principal, the term has become virtually synonymous with the term “agent.”
Broker of Record: See Agent of Record.
Builder’s Risk Insurance: Indemnifies for loss of or damage to a building under construction. Insurance is normally written for a specified amount on the building and applies only in the course of construction. Coverage customarily includes fire and extended coverage and vandalism and malicious mischief. Builders risk coverage can be extended to a “special” form as well. The builders risk policy also may include coverage for items in transit to the construction site (up to a certain percentage of value) and items stored at the site.
Business Plan: A blueprint and communication tool for your business. A device to help you, the owner, set out how you intend to operate your business. A road map to tell others how you expect to get there.
Buy-Sell Agreement: Buy-Sell Agreement: An agreement made by the owners of a business to purchase the share of a disabled or deceased owner. The value of each owner’s share of the business and the exact terms of the buying-and-selling process are established before death or the beginning of disability.
Cancellation: Termination of an insurance policy or a bond either by the insured or by the insurance company.
Cancellation Clause: A clause in a bond that permits the surety to terminate its future liability under the bond by serving written notice upon the obligee.
Capacity: The size of a bond a surety is able to cover.
Capital Retention Agreement: An agreement between surety and indemnitor whereby the indemnitor agrees to maintain a certain level of equity or other covenants in exchange for bond credit. If the indemnitor defaults, the surety has the right to seek retribution as outlined in the agreement.
Captive Agent: A licensed insurance agent who sells insurance or bonds for only one company.
Captive Insurance Company: A company owned solely or in large part by one or more non-insurance entities for the primary purpose of providing insurance coverage to the owner or owners. The company’s stock is controlled by one interest or a group of related interests so as to provide coverage for their business operations. A captive insurance company may be a non-admitted, nonresident, or foreign insurer. Sometimes it may provide reinsurance to a self- insured or a domestic company.
Cardinal Change: A truly fundamental change by the obligee in the nature of the bonded contract is a breach of contract which discharges the principal from its obligations to perform further. This type of change is usually referred to in the case laws as a “cardinal change.” When a cardinal change in the bonded contract is found to occur, both the contractor and the surety will be discharged from further performance.
Caucus: Private meeting or series of meetings that take place in concert with a dispute resolution process. Can include a meeting between the neutral third party and each of the interested parties separately. In large scale group processes, it can consist of an informal meeting of parties with similar interests. The caucus serves to give parties a chance to create new alternatives, clarify their proposals and interests, gather information, and/or allow for a “cool-down period.”
Cede: To transfer all or part of a risk written by an insurer (the ceding, or primary company) to a reinsurer.
Ceding Company: The insurer which cedes all or part of the insurance or reinsurance it has written to another insurer. A company which has placed reinsurance, distinguished from the company that accepts it.
Certificate of Insurance: A statement of coverage issued to an individual insured under a group insurance contract, outlining the insurance benefits and principal provisions applicable to the member.
Certiorari, Bond on Petition for Writ of: Certiorari is a writ issuing out of a superior court to call upon the record of a proceeding in an inferior court before an administrative officer or body for review by the superior court. The one who petitions for the writ usually is required to give bond or security for the payment of the costs incurred in connection with the petition.
Change Order: A written document between the owner and the contractor signed by the owner and the contractor authorizing a change in the work or an adjustment in the contract sum or the contract time. A change order may be signed by the architect or engineer, provided they have written authority from the owner for such procedure and that a copy of such written authority is furnished to the contractor upon request. The contract sum and the contract time may be changed only by change order. A change order may be in the form of additional compensation or time; or less compensation or time known as a Deduction (from the contract) the amount deducted from the contract sum by change order.
Claimant: A term used to describe one making a claim against a bond, or one making a claim in a non-judicial dispute resolution proceeding. Those persons or entities who are entitled to make a claim against a statutory bond are defined in those statutes. In the case of non-statutory bonds, the definition of a claimant will usually be set forth in the bond.
Claimant’s Bond: In cases where, pending final decision on the merits, property is released to one not a party to the litigation, who claims to be the owner thereof, the claimant may be required to give bond conditioned for the return or redelivery of the property if ordered to do so by the court.
Claims Made Policy: A liability insurance policy under which coverage applies to claims filed during the policy period.
Co-Fiduciary: One who serves as a fiduciary jointly with another, such as a co-administrator, coexecutor, co-guardian, etc.
Collateral: Anything of value pledged with the surety to secure it against loss through default of the principal who supplies the collateral. An ILOC is a preferred form of collateral.
Combined Ratio: A measure of the relationship between dollars spent for claims and expenses and premium dollars taken in; more specifically, the sum of the ratio of losses incurred to premiums earned and the ratio of commissions and expenses incurred to premiums written. A ratio above 100 means that for every premium dollar taken in, more than a dollar went for losses, expenses, and commissions.
Commercial Bonds : All bonds, except those classified as contract or performance, are commercial bonds. These bonds are usually required by law and are unique for each case.
Commercial Blanket Bonds :Guarantees the honesty of all employees of an organization.
Commission: The part of an insurance premium paid by the insurer to an agent or broker for his services in procuring and servicing an insurance or surety account.
Commissioner of Insurance: The official charged with enforcement of the laws pertaining to insurance in his state. In some jurisdictions this official is called the Superintendent or Director of Insurance.
Committee: One appointed by a court to manage the estate of a person ho has been declared incompetent. Also known as a conservator or a curator.
Common Law Bond: A non-statutory bond, one on which the rights and obligations are determined by it terms or the law of contract.
Completed Operations: Liability arising out of faulty work performed away from the premises after the work or operations are completed. Applicable to contractors, plumbers, electricians, repair shops, and similar firms. This form of liability insurance provides coverage for bodily injury and property damage rising from completed or abandoned operations, provided the incident occurs away from premises owned or rented by the insured. Operations are deemed completed at the earliest of: (1) when all operations to be performed by or on behalf of the insured under contract have been completed; (2) when all operations to be performed by or on behalf of the insured at the site of the operations have been completed; (3) when the portion of work out of which injury or damage rises has been put to its intended use by a party other than the contractor or subcontractor.
Completing Contractor: In a surety default situation, the contractor retained by the surety or the obligee to complete the bonded obligation. Occasionally, the defaulting contractor may serve in this capacity, although under the surety’s supervision and control.
Completion Agreement: Agreement signed between the surety for a defaulting contractor and a contractor chosen to complete the bonded obligation. The essential purpose of the agreement between the surety and replacement contractor is to delineate the areas of responsibility with respect to completion of the bonded contract and payment therefor. These responsibilities may be outlined in a separate agreement between the surety and replacement contractor, or in one instrument executed by the surety, obligee and replacement contractor.
Completion Bond: One covering performance of a construction project that names as an obligee a lender or similar party in a position to invoke the performance features of the bond for his benefit without an obligation to provide funds to complete.
Compliance Bond: These are the most commonly required and freely written license and permit bond. Required by states, counties, and local cities or towns. These bonds guarantee that a person or business will conduct a business or profession according to the privilege granted and in conformity with the governing laws, ordinances, or regulations. (e.g. electricians, plumbers and other construction tradespersons)
Condition: The technical name of one of the four parts of a bond. The condition is not a
qualification of coverage as in the case of an insurance policy but is the essence of the guarantee.
Condition Precedent: A contractual condition that suspends the coming into effect of a contract unless or until a certain event takes place. Many residential real estate contracts have a condition precedent which states that the contract is not binding until and unless the property is subjected to a professional inspection, the results of which are satisfactory to the purchaser. Compare with “condition subsequent”.
Confirmation Letter: See Bank Confirmation Letter
Consent of Surety: Many contracts require, and good practice dictates, that a surety’s consent be obtained in connection with final payment of retainage under a bonded contract, or any time that payment is being made in the face of potential claims or defaults. In this manner, the surety cannot be heard to later complain that contract balances, to which it looks for security, were released prematurely.
Consequential damages: Consequential damages are those that are not a direct result of an act, but a consequence of the initial act. In a contract, damages are usually stated as either liquidated damages, actual damages or consequential damages. For example, a contractor has been hired to build a casino. If there is a delay and liquidated damages has been assessed, it is usually stated in dollars/day so the contractor might have to pay, for example, $500 for every day the project is delayed. With actual damages, for every day that the project has been delayed, the owner will be awarded damages based on actual cost that the owner can verify. For example, because the casino has been delayed for 1 week, the owner still has to pay the rent, the employee wages and utility bills, etc, the contractor will have to pay damages totaling those costs. With consequential damages, the contractor will be liable to the owner for the damages as a consequence of the delay. For example, because the casino has not open for 1 week, as a consequence, the casino has lost out on 1 week’s worth of revenue, which potentially could be millions of dollars.
Conservator: A person, official or institutuiion designated to take over and protect the interest of an incompetent. .
Consignee: One to whom merchandise is shipping on consignment.
Constructability: The optimizing of cost, time, and quality factors with the contracting structures and techniques used on a project; accomplished by matching owner contracting requirements with available construction industry practices.
Construction Industry Rules of the American Arbitration Association: Representatives of the twenty-two construction industry organizations l constitute the National Construction Dispute Resolution Committee (NCDRC) of the American Arbitration Association. This committee is the sponsor of the arbitration and mediation procedures specially designed for the construction industry by the AAA. The rules may be found at www.adr.org
Construction Management: A construction delivery method where the construction manager serves as either the agent (“Construction Manager-Agent” or “Pure Construction Manager”) for the project owner, or as the general contractor (“Construction Manager at Risk”) for a project, providing pre-construction and construction services.
Constructive Acceleration: Constructive acceleration occurs in the absence of an owner directed acceleration, such as where the owner has refused a valid request for time extensions or threatened other action which requires the contractor to accelerate its work to avoid liquidated damages, or other loss or risk of loss. The classic case is when a request for a time extension for excusable delay is denied and the contract provides liquidated damages for late completion. The law construes this as an order by the owner to complete performance within the originally specified completion date, a shorter period at higher cost than provided for in the contract. The constructive acceleration doctrine allows recovery for the additional expenses the contractor can establish.
Contingency: An amount or percentage of the total construction budget included in a guaranteed maximum price contract to address additional costs arising during the construction of the project. The contractor’s contingency is usually under the control of the contractor and covers such things as unanticipated costs, minor mistakes in bidding or performance of work, defaults by suppliers and subcontractors, etc. An owner’s contingency is usually a fund outside of the contract sum, controlled by the owner, for changes in the work or schedule not contemplated at bid time. The failure to identify the nature of the contingency, its use and control, is a frequent cause of dispute which could be easily avoided by careful contract drafting.
Contingent Payment Clause: A clause in a subcontract that makes payment from the owner to the general contractor a condition precedent to the subcontractor’s right to payment from the general contractor. Also known as a “pay if paid” clause. Contrast this with “pay when paid” clauses that speak to the timing of payment rather than liability for payment.
Continuation Certificate: A document evidencing continuation of a bond beyond the stipulated termination data.
Continuity Clause: The clause in a bond, or rider attached to a bond, under which that bond, subject to its terms, assumes liability for any loss due to acts which occurred while a prior bond was in force but which were not discovered until after the expiration of the discovery period of the prior bond.
Contract: An agreement between two or more parties to either do or not do a specific thing.
Contract Balance: The original contract price, including adjustments for changes, less the amount paid to the contractor in accordance with the contract terms.
Contract Bond: A bond given to secure the performance of a contract. Frequently, two bonds are required – one to cover performance and the other to cover payment of certain labor and material bills. The former is commonly known as a performance bond, and the latter is known as a payment bond.
Contract Price: The whole sum of money which passes from the owner to the contractor when final settlement is made between the parties to the contract. The contract price is used as the basis for the premium charge on most types of construction and supply contract bonds.
Corporate Surety: A surety which is a corporation, licensed under various insurance laws, and has under its charter the legal power to act as surety for others.
Cost Bond: A bond filed by a litigant in a court action guaranteeing payment of the court costs.
Cost Plus or Cost Plus Fee Agreement: An agreement under which the contractor is reimbursed for its direct and indirect costs and, in addition, is paid a fee for its services. The fee is usually stated as a percentage of cost, but may be a fixed amount. The agreement may or may not include a guaranteed maximum price or a savings split
Co-Surety: One of a group of Sureties directly participating in a bond, with the obligation under the bond joint and several.
Co-Suretyship: A procedure whereby two or more surety companies jointly become sureties on a bond.
Counter Replevin: See Replevin – Defendant’s Bond to Recover Property Replevied.
Countersignature: A signature of a licensed domiciled agent or representative required by the laws of some states to validate the bond.
Court-Annexed Mediation: Any ADR process which parties may be required or advised to undertake by the court, or an ADR facility which is offered by the court.
Court Bonds: A general term applied to all bonds filed in court, whether Fiduciary or Judicial Bonds (See “Fiduciary” and “Judicial” Bonds for amplification).
Cumulative Liability: When one bond is canceled and a second bond is issued to take its place, if the first bond has a “discovery period,” the surety company is exposed to the possibility of a loss equal to the aggregate sum of the two bonds.
Current Ratio: The ratio of current assets to current liabilities. Bond underwriters like this ratio to be 2 to 1 or better on the balance sheets of contractors for whom they are considering contract bonds. If it drops below 1.0, the ability to pay bills is impaired. If it is much greater than 2.0, there is a possibility that assets are not being used efficiently to generate new revenue.
Custom Bond: The primary purpose of these bonds is to assure the payment of import duties and taxes, and compliance with all regulations governing the entry into the United States of merchandise from foreign sources.
Cut Through Clause: A clause, rider, or endorsement occasionally found in treaties which allows the obligee on a bond to recover directly from the reinsurer in the event of a failure by the surety (reinsured) to pay a loss due to specified circumstances. Because there are entirely separate contractual relationships as between obligee and surety (reinsured) and between reinsured and reinsurer, there is no privity of contract between insured and reinsurer absent such a clause.
D/B/A: A common abbreviation meaning “doing business as.”
Damages : Damages are monetary fines. Comes in the form of liquidated damages, actual damages and consequential damages.
Debt to Net Worth Ratio: A ratio of total debt to net worth that measures the equity the owners have in the construction company compared to the interests of outsiders. Sureties look for a ratio of 3:1 or less.
Deductible: An amount which a policyholder agrees to pay, per claim or per accident, toward the total amount of an insured loss.
Default: Violation of the terms of the bond or the bonded contract by the principal.
Default Insurance: A relatively new form of insurance that protects an insured against the losses caused by the defalcation of another party.
Defendant :In a court case, the accused person or organization.
Defendants Bonds: Bonds given by defendants in litigation enabling them to retain or regain possession of property, pending the outcome of a suit, or to suspend the execution of a judgment, order or decree of a court while the defendant seeks reversal of an unfavorable judgment in a higher court.
Deferred Premium Payment Bond: See Retrospective Premium Payment Bond.
Delivery Methods: Various methods and contractual arrangements for contracting for the design, construction, and delivery of construction projects. Examples would include Construction Management (both pure or agency, and at risk), Design-Build, and Design-Bid-Build.
Depository Bond: This guarantees repayment of moneys deposited with a bank in the event of failure or insolvency of the bank. Now a negligible line of surety business, it was once a large one. The Federal Deposit Insurance Corporation (FDIC) now guarantees the payment of bank deposits up to $250,000 per account title.
Depository Liability: A public official is liable for public funds, which he deposits in a bank and cannot pay over because of insolvency or failure of the bank. In many states, statutes provide for the designation of depositories for public funds and for the furnishing of collateral security by such depositories. Such laws, if strictly complied with, usually exempt the public official and his surety from liability for loss through failure of any of the designated and qualified depositories.
Design-Bid-Build: The most common construction delivery method. The owner contracts with a design professional, and requests bids from a contractor, contracting separately with the designer and contractor.
Design-Build: A construction delivery method where a single entity is contracted to provide both design and construction.
Direct Writer: The industry term for a company which uses its own sales employees to write its policies. Sometimes refers to companies which contract with exclusive agents.
Direct Written Premium: The entire premium arising from bonds or policies issued directly by the primary insurance company to policyholders.
Directed Suretyship: Owner designation of a specific producer or surety company from which contractors must obtain surety bonds. The federal government and several states have enacted legislation expressly prohibiting this practice.
Discharge of Attachment Bond: A bond permitting a defendant to retain possession of property attached by a plaintiff.
Discharge Mechanics Lien: See Mechanics Lien – Bond to Discharge.
Discovery Period: Provision is made in certain bonds and policies to give the insured a period of time after the cancellation of the bond or policy in which to discover that he/she has sustained a loss. The loss must be within the terms of the contract and must have been recoverable if the contract had remained in-force.
Dispute Review Board or DRB: A construction dispute avoidance and resolution technique involving the selection of three experienced, respected, and impartial observers before construction begins. The Board meets at the job site periodically. Members are provided with the contract plans and specifications, become familiar with the project procedures and the participants, and are kept abreast of job progress and developments. When any dispute arises that cannot be resolved by the parties, it is referred to the DRB for a non-binding ruling which typically must be followed pending the exercise of other contract dispute resolution procedures.
Do Nothing Option: After carefully investigating and considering all issues associated with a default, a surety may determine that it, indeed, has no obligation to perform and may communicate to the obligee that it will not perform. This is the surety’s “do nothing” option…although it will usually be doing something…preparing for the litigation that often results when the obligee takes exception to that position. This term has often been misunderstood to refer to a surety’s supposed option to simply stand by its principal’s position without the benefit of further investigation and analysis. Most responsible sureties would suggest the latter option does not really exist.
Dissolve Injunction: See Injunction – Defendant’s Bond to Dissolve.
Dual Obligee Bond: A bond which names as additional obligee a lender or other party, putting them in a position to invoke the performance features of the bond. Obligees are most often added to the bond by a Dual Obligee Rider to the bond, rather than being named in the body of the bond.
Dun & Bradstreet: This is an independent company that provides analysis reports on business entities. There are two types of reports available from Dun & Bradstreet (D&B): (1) a reference book that is divided by state and city and includes a financial rating for both publicly and nonpublicly traded companies; (2) a full summary report which includes a detailed listing of the history of the company, its ownership, their operations and any significant current legal proceedings. Sometimes financial and credit information is also available.
Earned Premium: The earned premium on a bond is at any time the amount which would compensate the surety for the protection furnished for the expired portion of the term of the bond.
Effective Date: The date on which coverage becomes effective. The onset of the premium period.
Employee Retirement Income Security Act : In place since 1974, this act requires a bond of 10 percent of the value of pension and profit-sharing plans.
Endorsement: A form attached to the bond to add to, alter or vary its provisions (See also Rider).
Equitable Subrogation: The rationale for equitable subrogation stems from the notion that those contract proceeds that are reserved for disbursement until the contract’s completion are as much for the indemnity of him who may be a guarantor of the performance of the contract as for him for whom it is to be performed. It is well settled in our law that the surety whose funds go to discharge contractor’s obligations is thereby subrogated to the rights of the owner to apply the contract balances to the completion of the project and payment of bills incurred in that connection. The completing surety is subrogated to the rights of other parties to the bonded project as well. A surety that fulfills a defaulting contractor’s obligations is subrogated to the rights of (1) the contractor, insofar as it is due receivables, (2) the material men and laborers who may have been paid by the surety, and (3) the owner for whom the project was completed. The completing surety’s right of subrogation arises in equity as an outgrowth of the suretyship relationship itself; it is not dependent on assignment, lien or contract.
Errors and Omissions : Insurance Covers damages resulting from negligence or mistakes that occurred in the course of doing business.
Estate: The assets entrusted to a Fiduciary.
Evaluative Mediation: Evaluative mediation is a process modeled on settlement conferences held by judges. An evaluative mediator assists the parties in reaching resolution by pointing out the weaknesses of their cases, and predicting what a judge or jury would be likely to do. An evaluative mediator might make formal or informal recommendations to the parties as to the outcome of the issues. Evaluative mediators are concerned with the legal rights of the parties rather than needs and interests, and evaluate based on legal concepts of fairness. Evaluative mediators meet most often in separate meetings with the parties and their attorneys, practicing “shuttle diplomacy”. They help the parties and attorneys evaluate their legal position and the costs vs. the benefits of pursuing a legal resolution rather than settling in mediation. The evaluative mediator structures the process, and directly influences the outcome of mediation. Evaluative mediation emerged in court-mandated or court-referred mediation. Attorneys normally work with the court to choose the mediator, and are active participants in the mediation. The parties are most often present in the mediation, but the mediator may meet with the attorneys alone as well as with the parties and their attorneys. There is an assumption in evaluative mediation that the mediator has substantive expertise or legal expertise in the substantive area of the dispute. Because of the connection between evaluative mediation and the courts, and because of their comfort level with settlement conferences, most evaluative mediators are attorneys.
Evergreen Clause: One that specifically states the expiration of a letter of credit will not take place without notice by the issuer and one that allows the issuer to conduct an annual review of the account party’s financial condition. If prior notice of expiration is not given by the issuer, the letter of credit is automatically extended for one year.
Excess Bond: A bond or policy covering the insured against certain hazards, applying only to loss or damage in excess of a stated amount, or primary insurance.
Excess of Loss Reinsurance: A generic term describing reinsurance which, subject to a specified limit, indemnifies the ceding company against the amount of loss in excess of the specified retention. It includes various types of reinsurance, such as Catastrophe, Per Risk, Per Account, and Aggregate Excess of Loss. Contrast with Pro Rata Reinsurance. A form of reinsurance which indemnifies the ceding company for that portion of the loss resulting from a single occurrence, however defined, that exceeds a predetermined amount, which is referred to as a first loss retention or deductible.
Exclusions: Provisions of a bond or policy referring to hazards or to property with respect to which no insurance is afforded.
Executor: A fiduciary named in a will to manage or distribute the assets of an estate and pay all just claims and debts. (see Administrator)
Expense Ratio: The percentage of the premium used to pay all costs of acquiring, writing, and servicing the bond.
Expiration: The date upon which a bond will cease to provide coverage unless previously canceled.
Facilitation: A collaborative process involving the use of a neutral third party (facilitator) to design and oversee a group process. Facilitation is used to help a group reach a goal or complete a task to the mutual satisfaction of participants. Often used when there are many interested parties or stakeholders, as opposed to mediation which tends to focus on a single issue dispute between two parties. (see Facilitator)
Facilitative Mediation: In facilitative mediation, the mediator structures a process to assist the parties in reaching a mutually agreeable resolution. The mediator asks questions; validates and normalizes parties’ points of view; searches for interests underneath the positions taken by parties; and assists the parties in finding and analyzing options for resolution. The facilitative mediator does not make recommendations to the parties, give his or her own advice or opinion as to the outcome of the case, or predict what a court would do in the case. The mediator is in charge of the process, while the parties are in charge of the outcome. Facilitative mediators want to ensure that parties come to agreements based on information and understanding. They predominantly hold joint sessions with all parties present so that the parties can hear each other’s points of view, but hold caucuses regularly. They want the parties to have the major influence on decisions made, rather than the parties’ attorneys. Facilitative mediation grew up in the era of volunteer dispute resolution centers, in which the volunteer mediators were not required to have substantive expertise concerning the area of the dispute, and in which most often there were no attorneys present. The volunteer mediators came from all backgrounds. These things are still true today, but in addition many professional mediators, with and without substantive expertise, also practice facilitative mediation.
Facilitator: A person competent in the use of dispute resolution who provides a neutral’s services to groups (usually more than two) involved in a dispute or conflict. The facilitator provides procedural assistance to the parties, enhancing information exchange and working with the parties to develop and evaluate possible agreements that could lead to a resolution.
Facultative Reinsurance: Reinsurance of individual risks by offer and acceptance wherein the reinsurer retains the faculty or privilege to accept or reject each risk offered.
Faithful Performance Bond: A bond guaranteeing that the principal will discharge his obligation as required by law.
Federal Bonds: Immigrants Bonds, Internal Revenue Bonds, and Customs Bonds. Loosely grouped under the miscellaneous classification.
Federal Deposit Insurance Corporation (FDIC): An agency formed as the result of bank failures in the 1930’s to insure the deposits of customers of member banks. The FDIC is an agency of the Federal Government and insures each account title up to $250,000.
Fee: n the context of a construction contract, this is the sum, either fixed, percentage or imputed that the contractor receives to cover his home office overhead and profit.
Fidelity & Surety Committee of the ABA: A subcommittee of the Tort and Insurance Practice Section of the American Bar Association. This subcommittee is one of the most active in the American Bar and is the source of most scholarly writing and educational materials on surety and fidelity claims law and practices in the U.S.
Fidelity Bond: Bonds designed to guarantee honesty. Generally, the bond guarantees honesty of employees. These bonds cover losses arising from employee dishonesty and indemnify the principal for losses caused by the dishonest actions of its employees.
Fiduciary: A person who occupies a position of special trust and confidence, particularly one who handles the affairs or funds of another.
Fiduciary Bonds: Bonds issued for persons either named in a will or appointed by the court to manage the affairs of others, such as wards, incompetents, etc., or to distribute a decedent’s estate assets in accordance with the provision of a will or order of the court.
Financial Guarantee Bond: A bond which 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 Responsibility Law: A statute requiring motorists to furnish, either before or after an accident, evidence of ability to pay damages. Such evidence may be furnished by a surety bond.
Financial Statement: A compilation of financial disclosures (including the balance sheet, income statement and other pertinent schedules) which the surety requires the bond applicant to furnish, setting forth his financial position as of a given time or period.
Financing by Surety: The surety providing direct or indirect financial assistance to the principal in the hope that the obligations secured by the performance bond will be completed by the principal.
Fixed Assets to Net Worth: A ratio that Indirectly measures liquidity showing what part of “permanent” assets are covered by “permanent” capital.
Fixed Penalty Bond: A bond the amount of which is expressed in a certain sum of money.
Flow Down Provisions: A contract provision by which the parties incorporate the terms of the general contract between the owner and the general contractor into the lower tier agreement.
Follow the Fortunes: A phrase referring to a provision found in some reinsurance contracts stipulating that once a risk has been ceded, the reinsurer is bound by the same fate as the ceding company for that risk.
Forfeiture Bond: A bond requiring payment of the entire penalty upon default of the principal, regardless of the size of actual loss.
Forthcoming Bond: This term is applicable to any bond conditioned for the return of redelivery of property in compliance with an order of a court. In some states, it may guarantee payment of a judgment.
Friend of the Project: A term coined by the American College of Construction Lawyers to describe a dispute avoidance and resolution process wherein a project advocate or friend of the project represents the project itself and not any of the contracting parties.
Fronting: A procedure under which a ceding company (the fronting company) cedes a risk it has underwritten to a reinsurer with the ceding company retaining none of the risk for its own account.
Funds Control: If a contractor does not qualify for a bond, another party may obtain the necessary bond and be responsible for paying subcontractors and suppliers.
Garnishment Bond to Discharge or Release: When money or property belonging to a defendant has been attached while in the hands of a third party, the processing is called a garnishment and the third party is called the garnishee. The bond is similar to a release of attachment bond.
General Conditions (contract provisions): A written portion of the contract documents set forth by the owner stipulating the contractor’s minimum acceptable performance requirements including the rights, responsibilities and relationships of the parties involved in the performance of the contract. General conditions are usually included in the book of specifications but are sometimes found in the architectural drawings.
General Conditions (project overhead/labor): Field-related tasks required to execute a contract. Common general condition cost components include: Labor supervision, temporary facilities, including trailers, portable toilets and temporary plants, personal protective equipment, travel and per diem, permits, sales and labor taxes, insurance and bonds. General condition costs can be estimated as a percentage of direct project cost. General condition cost percentages tend to be higher for small projects and smaller for large projects.
General Indemnity Agreement: An agreement whereby the Principal and individual indemnitors agree to make a reimbursement to the surety for any loss the surety may incur under the bond. These agreements usually contain provisions allowing the surety certain controls over disputes and access to information and collateral. They may provide for the posting of collateral in the event of an imminent default. They usually contain a grant of a security interest in addition to the equitable rights the surety may already have in job receivables, equipment, work in process, etc. These agreements are to a surety what loan agreements, security agreements, personal guaranties, and financing statements are to a banker.
General Partner: General partners are liable for all of their partnership’s debts.
Government Code Bond: Performance and Payment Bonds written on Texas public works projects in accordance with Chapter 2253 of the Texas Government Code.
Guarantee: A promise to answer for the debt or default of another.
Guaranty Fund: A fund, derived from assessments against solvent insurance companies, to absorb losses of claimants against insolvent insurance companies.
Guardian Ad Litem: One appointed to preserve the assets of the estate of a minor during a litigation which delays the appointment of a general guardian.
Guardian or General Guardian: A fiduciary appointed by the court to administer the estate of a minor.
Hard Market: That part of the insurance sales cycle in which competitive pricing is at a minimum as companies charge the premiums necessary to meet their underwriting losses in order to avoid insolvency and boost capacity; usually associated with a sharp decline in capacity.
Hazard: A term applied to certain conditions which may create or increase the probability of a loss because of a given covered peril.
Heir: One who inherits or is entitled to inherit.
High-Low Arbitration: The parties agree privately without informing the arbitrator that the arbitrator’s final award will be adjusted to a bounded range. Example: P wants $200,000. D is willing to pay $70,000. Their high-low agreement would provide that if the award is below $70,000, D will pay at least $70,000; if the award exceeds $200,000, the payment will be reduced to $200,000. If the award is within the range, the parties are bound by the figure in the award.
Hold Harmless Agreement: An agreement to pay certain claims that might come up against another person.
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.
Implied Contract: A contract with existence and terms determined by the actions of the persons involved, not by their words.
Implied Warranty: An unstated promise, imposed on a seller, that what is sold is fit for normal use, or, if the merchant knows what the buyer wants the thing for, that it is fit for that particular purpose. Unless these implied warranties are expressly excluded (for example, by clearly labeling the thing sold “as is”), a seller will be held to them
Impossibility of Performance: In contracts in which the performance depends on the continued existence of a given person or thing, an implied condition is that the perishing of the person or thing shall excuse performance. One is not excused from performance merely because performance becomes more expensive than originally contemplated. Mere unforeseen difficulty or expense does not constitute impossibility and is not ordinarily an excuse.
Incentive Clause: A contractual provision which provides payments beyond the stated amount in the contract if completion is ahead of schedule or if other objectives are reached which may involve cost savings, safety, quality or absence of disputes.
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.
Indebtedness: The sum of one’s obligation.
Indefinite Delivery Contract: There are three types of indefinite-delivery contracts, i.e., definite quantity contracts, indefinite quantity, and replacements contracts. (a) A definite quantity contract provides for delivery of a definite quantity of supplies or services for a fixed period, with deliveries to be scheduled at designated locations upon order. (b) An indefinite quantity contract provides for an indefinite quantity, within stated limits, of specific supplies or services to be furnished during a fixed period with deliveries to be scheduled by placing orders with the contractor. The contract shall require the government to order and the contractor to furnish at least a stated minimum quantity of supplies or services and, if ordered, the contractor to furnish any additional quantities not to exceed a stated minimum Indefinite quantity contracts are sometimes referred to as task order and delivery order contracts. A task order contract means a contract for services that does not procure or specify a firm quantity of services (other than a minimum or maximum quantity) and that provides for issuance of orders for the performance of tasks during the period of the contract. A delivery order contract means a contract for supplies that does not procure or specify a firm quantity of supplies (other than a minimum or maximum quantity) and that provides for the issuance of orders for the delivery of supplies during the period of the contract. (c) A requirements contract provides for filling all purchase requirements of designated government activities for supplies or services during a specified contract period, with deliveries to be scheduled by placing orders with the contractor.
Indefinite Term: Having no fixed termination.
Indemnify: To compensate the victim of a loss for the actual loss sustained.
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: A promise to prevent or compensate for loss.
Indemnity Agreement: A contract by which one party agrees to protect another against loss.
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 Clause: There are typically three parts to an indemnity clause. One party agrees to (1) indemnify, (2) defend, and (3) hold harmless the other party. By “indemnifying” the first party is agreeing to reimburse the second party for its losses after those losses have been determined by litigation, arbitration, or settlement. By “defending,” the first party is agreeing to pay for the second party’s legal expenses as it defends the claim brought by some third party. By agreeing to “hold harmless” the second party, the first party agrees to protect the second party against harm from suits by third parties. Indemnity clauses fall into three groupings. These are commonly called “broad form,” “intermediate form,” and “narrow form.” Broad form indemnity, as its name implies, requires the first party to indemnify the second party for all damages arising out of the project whether caused by the first party, a third party, or even the second party. Intermediate form indemnity also shifts much risk to the consultant – but not as drastically as does the broad form. It may state, for example, that the consultant will indemnify the client for all damages caused “in whole or in part” by the consultant. This language can be deceptively subtle. Courts interpret it to mean that if the consultant contributed even just a little bit to causing the damages, it will be required to indemnify the client for ALL of the damages, including those caused by the client’s negligence. Narrow form indemnity requires the first party to indemnify the second party only for those damages caused by the first party’s negligence.
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.
Independent Contractor: One who contracts to perform certain functions or deliver goods by his own methods and without being subject to the control of another party except as to the results. Many obligations attach to an employer that are not present when the same work is performed by an independent contractor.
Indirect or “Backdoor” Financing: The concept of indirectly financing a principal in a near default situation is sometimes called “backdoor financing.” Such indirect financing may take the form of direct payments to the principal’s creditors to help get current on delinquent obligations, providing additional bonds to the principal, or a loan guarantee at a bank.
Inherit: To receive from one’s ancestors or predecessors.
Inheritance: A legacy.
Injunction: A court order prohibiting or requiring a certain action.
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 conditioned upon the furnishing by the plaintiff of a bond to indemnify the defendant against loss in case it is finally 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 conditioned, in effect, to pay such damages that the plaintiff may sustain as a result of the performance of the act or acts originally enjoined, it being then the privilege of the defendant to proceed as if the injunction has never been issued.
Insolvency: The condition of being unable to pay one’s maturing debts.
Internal Revenue Bonds: A class of Federal Bonds guaranteeing producers’ of distilled spirits, tobacco, etc., compliance with laws and regulations, as well as their payment of taxes.
Intestate: Not having made a valid will. One who dies without having made a valid will.
Irrevocable Letter of Credit: See also, Letters of Credit. Irrevocable credits may not be modified or canceled by the customer. The customer’s issuing bank must follow through with payment to the seller so long as the drawer complies with the conditions listed in the letter of credit. Changes in the credit must be approved by both the customer and the drawer. If the documentary letter of credit does not mention whether it is revocable or irrevocable, it automatically defaults to irrevocable.
Job Order Contracting: A construction delivery method for contracting for the minor repair, rehabilitation, or construction of a project when the work is of a recurring nature but the delivery times, type, and quantities of work required are indefinite.
Joint Control: This is an arrangement by written agreement and acknowledgement of a financial institution holding estate funds whereby any access to said funds requires two signatures: the fiduciary’s and that of a third party, i.e. attorney, surety, and agent.
Joint and Several Liability: Liability of more than one person for which each person may be sued for the entire amount of damage done or owed by all.
Joint Venture: An association established to conduct a single transaction or series of related transactions, as contrasted to an ongoing business that involves many transactions. It is a special purpose partnership whose members can be sole proprietorships, partnerships or corporations.
Judgment: The obligation created by a court decree or decision.
Judicial Bond: Bonds required of litigants who seek to avail themselves of privileges or remedies which are allowed by law, upon condition that a bond be furnished for the protection of the opposing litigant or other interested parties.
Jurat: That part of an affidavit where the officer certifies that the same was “sworn” before him. The jurat is usually in the following form: ‘Sworn and subscribed before me, on the ___ day of ___, 2009, (signature of Notary Public)’
Large, Complex Construction Case Procedures (A.A.A.): The AAA Procedures for Large, Complex Construction Disputes are designed for cases involving claims of at least $1 million. Key features include: mandatory use of the procedures in cases involving claims of $1 million or more; a highly qualified, trained Panel of Neutrals, compensated at their customary rates; a mandatory preliminary hearing with the arbitrators, which may be conducted by telephone; broad arbitrator authority to order and control discovery, including depositions; presumption that hearings will proceed on a consecutive or block basis.
Last Surety On Form: Workers Compensation Bonds falling under this description obligate the surety for all self-insured retention liability of the principal, dating back to the inception of the principal’s self-insured qualification. The surety may be absolved of all liability once their bond is superseded by acceptable replacement security.
Legal Liability: Obligation imposed by law.
Legatee: One to whom property is given under the terms of a will.
Lessee: A tenant.
Lessor: One who grants a lease.
Letter of Credit: There are many types of letters of credit. The type used to guarantee a contractor’s performance is a “standby” letter of credit in which a bank stands ready to pay over the amount of the letter to the owner of the project (obligee) in the event of default. A letter of credit differs significantly from a surety bond and one is not a substitute for the other. The Miller Act which applies to federal construction recognizes this fact and does not permit the use of a letter of credit to guarantee performance of such contracts.
Letter of Intent: During the course of negotiating a construction contract or subcontract, the parties may wish to begin performance before there has been final agreement. A letter of intent is often issued as a directive to commence work with an agreement to pay for that work if a final agreement is not reached.
Letter of Understanding: This letter is required of a all principals who post collateral in support of a Self-Insured Workers Compensation Bond. The letter explains the nature of the risk and outlines
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 and Permit Bonds: These are bonds required by law or ordinance as a condition precedent to the granting of a license to engage in a particular business or a permit to exercise a specific privilege.
Lien: A charge upon real or personal property for the satisfaction of a debt.
Lien Release: A written document from the contractor to the owner that releases the Lien, Mechanic’s or Material following its satisfaction.
Lien Waiver: A written document from a contractor, subcontractor, material supplier or other construction professional(s), having lien rights against an owner’s property, relinquishes all or part of those rights. Lien waivers are generally used for processing progress payments to prime or main or subcontractors as follows: Conditional Lien Waiver, Unconditional Lien Waiver, and Final Lien Waiver
Limit of Liability: The maximum amount a surety is liable to pay in case of a loss as set forth in the contract.
Limited Liability Company: An LLC is a hybrid business entity created by statute. It is anunincorporated association of members which, if properly structured, receives pass-through federal tax treatment and limited liability for its members.
Limited Partner: An owner in a limited partnership who’s liable only up to the amount of money invested.
Line of Credit: Financial institutions offer this to some customers. It allows the customer to borrow up to a certain amount of money without applying for another loan.
Liquidate: To pay a debt. To settle the accounts and distribute the assets of an estate.
Liquidated damages: In a construction context, liquidated damages are damages specified in a contract to be paid in the event of an unexcused delay. Liquidated damage clauses, to be enforceable, must not be written to penalize, but as a reasonable approximation of the probable loss that will be caused by delayed performance. An additional requirement is that the actual damages caused by delay would be difficult or impossible to determine. In a contract, damages are usually stated as either liquidated damages, actual damages or consequential damages. For example, a contractor has been hired to build a casino. If there is a delay and liquidated damages has been assessed, it is usually stated in dollars/day so the contractor might have to pay, for example, $500 for every day the project is delayed. With actual damages, for every day that the project has been delayed, the owner will be awarded damages based on actual cost that the owner can verify. For example, because the casino has been delayed for 1 week, the owner still has to pay the rent, the employee wages and utility bills, etc, the contractor will have to pay damages totaling those costs. With consequential damages, the contractor will be liable to the owner for the damages as a consequence of the delay. For example, because the casino has not open for 1 week, as a consequence, the casino has lost out on 1 week’s worth of revenue, which potentially could be millions of dollars.
Liquor Bond: (See Alcohol Bond)
Litigant: A party to an action at law.
Little Miller Acts: Statutes in all fifty states and the District of Columbia require performance and payment bonds for state government construction contracts. These state statutes often are called “Little Miller Acts” because many of them are modeled after the federal Miller Act. The “Little Miller Act” for Texas is Section 2253 of the Government Code, the codification of a law originally known as the McGregor Act.
Long-Term Bond: (Fiduciary) A bond required of a fiduciary whose duties are normally expected to extend over a considerable period of time. (See also: “Short-Term Bond”)
Look See Money: Money spent by the surety to finance the principal while the surety is investigating a default or potential default and analyzing its options.
Loss Expense- Unallocated: Salaries and other expenses incurred in connection with the operation of a claim department of an insurance carrier which cannot be charged to individual claims.
Loss Ratio: The percentage which incurred losses bear to premiums.
Lost Securities Bonds: Bonds given by owners of valuable instruments (i.e. stocks, bonds, promissory notes, certified checks, etc.) which are alleged to have been lost or destroyed, in order to protect the issuers against loss which may result from the issuance of duplicate instruments or, in some instances, payment of cash value thereof.
Lump Sum Agreement: See Stipulated Sum Contract.
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.
Mandamus: This is a common law writ issuing from a superior court to an inferior court,
corporation, or public officer, requiring the person so ordered to do some particular act therein specified, which pertains to his office. If the writ is issued before there has been a final decision on the merits, the person requesting the mandamus may be required to give bond to indemnify the person so ordered against loss or damage in case it is finally decided that the mandamus should not have been issued.
Manual: A book published by an insurance or bonding organization giving information as to rates, classifications, codes and other data. (Specifically, for Fidelity, Forgery and Surety Bonds, the rate manual of the Surety Association of America.)
Manual Rate: The cost of a unit of insurance or bond protection as published in the pertinent manuals of various organizations in the insurance industry, and again seen in the rate manual, as to bonds, of the Surety Association of America.
Martindale Hubbell Law Directory: This is a directory maintained in Home Office that provides information on both individual attorneys and law firms. Information may include schooling, year graduated, legal expertise, members/partners of a firm, and a rating (CV, BV, AV, with AV being the best). Directory is either in hardback or on CD Rom.
Materialman: A person who supplies building materials for a construction or repair project. A more general word is “supplier”
Material Take Off: is a term used in engineering and construction, and refers to a list of materials with quantities and types (such as specific grades of steel) that are required to build a designed structure or item. This list is generated by analysis of a blueprint or other design document. The list of required materials for construction is sometimes referred to as the Material Take Off List (MTOL).
McCarran-Ferguson Act: A federal statute passed in 1945 declaring that continued regulation and taxation by the states of the business of insurance is in the public interest. The act exempts the business of insurance from federal antitrust laws to the extent that there is state regulation. The law does not provide an antitrust exemption for acts of boycott, coercion or intimidation. (15 USCS §§ 1011-1015)
McGregor Act: The popular name of the original law establishing the requirements for bonds on public projects in Texas and establishing procedures for perfecting mechanic’s bond claims on such projects in Texas. It has since been amended several times and codified as Chapter 2253 of the Texas Government Code
Measured Mile Analysis: A “measured mile” analysis compares the productivity of a period that has been impacted by a negative condition or event to the productivity of similar work under normal, un-impacted conditions. The theory is that the difference between a contractor’s actual inefficient productivity and an identified normal productivity is the amount of excess cost to the contractor as a direct result of labor inefficiencies and loss of productivity.
Mechanic’s Lien: A right to detain property exercised by one who has furnished labor or material.
Mechanics Lien – Bond to Discharge: A lien against real estate may be filed for an amount claimed to be due for labor or materials furnished for the construction of a building or other improvement upon the property. Pending final determination of the owner’s liability, the owner may discharge the lien by giving bond conditioned for the payment of any amount that may be found due to claimant with interest and costs.
Mediation: The most popular form of alternative dispute resolution (ADR), mediation involves the appointment of a mediator who acts as a facilitator assisting the parties in communicating, essentially negotiating a settlement. The mediator does not adjudicate the issues in dispute or to force a compromise; only the parties, of their own volition, can shift their position in order to achieve a settlement. The result of a successful mediation is called a “settlement.” Compare with arbitration.
Mediator’s Proposal: A good mediator will not let the parties simply walk away without trying to come up with some alternatives. At the point of impasse, the mediator may make a proposal to settle the case. The proposal would be presented confidentially to each side and only the mediator would know whether it has been accepted by all parties. That way, neither side is punished for making a big move at the end. One side will only know the other made the move if the case settles.
Miller Act: Miller Act – A 1935 statute mandating surety bonds on all federal public works contracts in excess of $100,000. State and local public works projects are protected by “Little Miller Acts.”
Mini-trial: An ADR procedure wherein a retired or sitting judge hears an abbreviated presentation of the evidence and renders a non-binding judgment on liability, damages, or both.
Minimum Premium: The smallest amount of premium acceptable for a specified period.
Miscellaneous Indemnity Bonds: Bonds which do not fit any of the well-recognized divisions or subdivisions, and therefore, are thus categorized. The bond manual will supply further data.
Mitigation of damages: A person who sues another for damages has a responsibility to minimize those damages, as far as reasonable. For example, in a wrongful dismissal suit, the person that was fired should make some effort to find another job so as to minimize the economic damage on themselves.
Modified Total Cost Method: A method of proving damages that focuses on the impacted work activities and adjusts the original estimate to remove mistakes, inaccuracies, and work items not affected.
Moody’s: See Standard & Poor’s.
Moral Hazard: The possibility of loss caused by, or accentuated, by the dishonesty or carelessness of the insured or others.
Name Schedule Bonds : These list individual people and the amount for which they are bonded. These bonds are used for city council members or other groups of government officials.
Name Schedule Public Official Bonds : These bonds use one bond with a list of names of the people and the amount for which they are bonded.
National Association of Surety Bond Producers: The National Association of Surety Bond Producers is an organization of over 500 independent insurance agencies and brokerage firms that specialize in providing surety bonding and insurance programs to construction contractors. Most NASBP member firms also offer expertise in commercial and miscellaneous surety bonding as well. NASBP is committed to strengthen professionalism, expertise and innovation in the surety industry and to advocate its use worldwide.
Negligence: Not only are people responsible for the intentional harm they cause, but their failure to act as a reasonable person would be expected to act in similar circumstances (i.e. “negligence”) will also give rise to compensation. Negligence, if it causes injury to another, can give rise to liability under tort. Negligence is usually assessed having regards to the circumstances and to the standard of care, which would reasonably be expected of a person in similar circumstances. Everybody has a duty to ensure that their actions do not cause harm to others. Between negligence and the intentional act there lies yet another, more serious type of negligence which is called gross negligence. Gross negligence is any action or an omission in reckless disregard of the consequences to the safety or property of another. See also contributory negligence and comparative negligence
Negotiable Instrument: Commercial paper which may be circulated with or without endorsement.
Negotiation: Process where parties directly exchange ideas, views, promises, and problems surrounding a dispute. Positional bargaining tends to focus on demands, and counter-demands of disputing parties, sometimes leading to a bargaining process where parties trade concessions and demands. Interest-based negotiations focus on the interests underlying one’s position on an issue. The parties explore their needs, concerns, and eventually work on developing mutually acceptable solutions that meet as many of the disputants’ interests as possible.
Net Quick Assets: The difference between allowable current assets and changeable current liabilities. This figure is referred to as the working capital. A contractor must have adequate working capital in order to be bonded.
Net Rating Factor: This figure is net of all credits and/or debits applied to rates for an account’s bonds. For example, if the account receives a 50% net worth credit and a 15% indemnity credit, the net rating factor would be .425 (.5 x .85).
Net Worth: The amount by which assets exceed liabilities. It is of concern to bond indemnifiers in determining the size of a job a contractor can handle.
No Damage for Delay Clause: A contract clause that provides that, in the event of a delay, the delayed party will be compensated only with an extension of time, but no monetary compensation.
Non-admitted Insurance Company: An insurance company not licensed to do business in a particular state; such a company may sell excess and surplus insurance in the state if admitted insurers decline to write a risk.
Notary Public: An official who attests signatures on documents.
Note: A written promise to pay a certain sum of money.
Obligation: An enforceable duty assumed by or imposed upon a person, firm or corporation.
Obligee: The person or firm protected against loss by a bond. Similar to the insured under an insurance policy.
Obligor: The entity for whose account the debt or default is made. Under a bond, strictly speaking, both the principal and the surety are the obligors since the surety company must answer if the principal defaults.
Occurrence Form: Workers Compensation Bonds meeting this description obligate the surety for all self-insured retention liability of the principal which accrue during the term of the bond. Without special precautions, the surety will remain forever obligated for liability accrued under the bond after termination, cancellation or replacement by a succeeding surety.
Occurrence policy: A liability insurance policy that covers claims arising out of occurrences that take place during the policy period, regardless of when the claim is filed.
Offset: A deduction; a counterclaim; a contrary claim by which a given claim may be reduced or cancelled.
Omnibus Language: This is a clause found in the Continuing Agreement of Indemnity –
Miscellaneous Form, which extends the signer’s indemnity to bonds written for “the Applicant; individually; jointly with others or on behalf of any of its subsidiaries, affiliates or divisions or their subsidiaries, affiliates or divisions now in existence or hereafter formed or acquired; or on behalf of individuals, partnerships or corporations. . . .”
Open Penalty Bond: A surety bond written without maximum limit on the liability of the principal or the surety.
Overpayment Defense: Improper payment of contract funds by the obligee is a defense which rarely allows the surety to obtain a full discharge but which often allows the surety to reduce pro tanto the cost of its performance obligation. Under most types of bonds, the surety’s obligation to perform is conditioned upon the obligee having fully performed its obligations under the bonded contract. One of the obligee’s primary obligations is to release payments to the principal in accordance with the terms of the contract. To the extent that the obligee fails to fulfill its contractual obligations by improperly releasing payments to the principal, the surety is entitled to be partially discharged. The extent of the surety’s discharge may depend upon the surety’s ability to demonstrate an actual injury as a result of the obligee’s overpayment. Panel: A list of persons, arbitrators, or judges selected to decide a specific case; a list of potential neutrals from which a selection is to be made.
Parent Company: A corporation owing or controlling one or more other corporations.
Partnering: Partnering is a construction industry dispute avoidance technique that attempts to establish a working relationship among all team members based on cooperation and teamwork and achievement of mutual goals and objectives. Partnering is a concept that every contract has an implied covenant of good faith and fair dealing, and through the exercise of that agreement, the stakeholders strive to create a synergy of purpose to solve problems for the good of the project.
Partnership: A legal relationship created by the voluntary association of two or more persons to carry on as co-owners of a business for profit.
Pay If Paid Clause: Also known as Contingent Payment Clause. A clause in a subcontract that makes payment from the owner to the general contractor a condition precedent to the subcontractor’s right to payment from the general contractor. Also known as a “Contingent Payment Clause.” Contrast this with “pay when paid” clauses that speak to the timing of payment rather than liability for payment.
Pay When Paid Clause: General contractors sometimes use pay-when-paid clauses in an attempt to avoid the cash flow problems that can arise when they’re forced to pay subcontractors before receiving payment from the owner. Under such a clause, the subcontractor agrees not to be paid for his or her work until the contractor is paid by the owner (e.g., “Subcontractor shall be paid within seven (7) business days after General receives payment from Owner for Subcontractor’s work”). Unless the contract expressly states otherwise, most courts interpret pay-when-paid clauses only to restrict the timing of payment to the subcontractor, and not to prevent payment altogether. (If the owner fails to pay, the clause will most likely be interpreted to require payment of the subcontractor within a “reasonable time.”) Generally, a pay-when-paid clause does not prevent payment unless it clearly states that payment by the owner is a “condition precedent” to payment of the subcontractor. This type of provision is sometimes called a “pay-if-paid clause.”
Penal Amount or Penalty: The limit of liability under a bond.
Per Occurrence Limit: A bond limit that is applied to each loss/occurrence that is incurred during the term of the bond. For example, if a surety receives 10 claims of $5,000 each on a bond with a per occurrence limit of $10,000, the surety would pay out $50,000.
Performance Bond: A bond that guarantees faithful performance of the terms of a written contractor for furnishing supplies or for construction of all kinds. Performance bonds frequently incorporate payment bond (labor and materials) and maintenance bond liability.
Permit: Permission given by a governmental authority to engage in some activity.
Performance Specifications: The written material containing the minimum acceptable standards and actions, as may be necessary to complete a project. Including the minimum acceptable quality standards and aesthetic values expected upon completion of the project.
Personal Indemnification: If the principal is a closely held corporation or partnership, the individual owners and their spouses may be asked to personally indemnify the bond. Personal indemnification demonstrates the principal’s personal commitment to the business entity and to the surety company.
Personal Surety: An individual who acts as surety for another, who may or may not exact a price for his services, and usually is not regulated by any governmental agency, such as is the corporate surety.
Petitioning Creditors’ Bond: When a petition is filed to have a person adjusted a bankrupt and application is made to have a receiver or a marshal take charge of the property of the alleged bankrupt prior to the adjudication, the petitioners are required to give bond to indemnify the alleged bankrupt for such costs as counsel fees, expenses, and damages that may be occasioned by such seizure in case the petition is dismissed or withdrawn by the petitioners.
Place in Funds Letter: An agreement between surety and indemnitor whereby indemnitor agrees to immediately provide the surety funds if surety shall be called upon to make payment under bond. The document supplements our indemnity agreement and in no way affects our rights under such.
Plaintiff: One who initiates an action at law.
Plaintiff’s Bond: Bonds given by plaintiffs in litigation enabling them to exercise certain privileges with permission of the court, such as Attachment, Injunction, and Replevin.
Position Schedule Bonds: A type of fidelity or public official bond which lists specific positions and their corresponding penalty amounts. Position schedule bonds use one bond but attach a schedule of positions to be bonded. Each name will list specific dollar amounts for which that individual is being bonded. This type of bond may be used to bond certain positions that have a high amount of turnover. Using a position instead of a name will reduce the paperwork involved year-to-year.
Power of Attorney: Authority given one person or corporation to act for and obligate another to the extent laid down in the instrument creating the power. In corporate suretyship, an instrument under seal which appoints an attorney-in-fact to act on behalf of a surety company in signing bonds.
Preconstruction Services: A range of activities performed by a contractor prior to execution of construction, including value engineering, constructability, cost and schedule studies, procurement of long lead time items, and staffing requirements.
Pre-dispute ADR Contract Clause: A clause included in the parties’ business agreement to specify a method for resolving disputes that may arise under that agreement. It may refer to one or more ADR techniques, even naming the third party that will serve as an arbitrator or mediator in the case. Pre-dispute agreements requiring arbitration of consumer disputes, or entered into as a condition of employment, have generated substantial backlash lately from people who argue that these clauses are adhesion contracts.
Preferred Stock: If you own this higher class of stock, you get your dividends before common stockholders. If the company folds, you also get assets before common stockholders do. The one thing you usually don’t have is voting rights.
Preferred Surety Bond Program: PSB (also known as Plan B), a program administered by the Small Business Administration. Provides incentives to encourage underwriters to provide surety coverage for small, minority-owned and woman-owned contractors.
Premium: The consideration paid to the company for its bonds or policy of insurance. An insurance premium includes a factor for the payment of losses.
Prequalification: A screening process wherein the owner or his/her appointed representative gathers background information from a contractor or construction professional for selection purposes. Qualifying considerations include competence, integrity, dependability, responsiveness, bonding rate, bonding capacity, work on hand, similar project experience, and other specific owner requirements.
Principal: In suretyship, the party whose actions, honesty or responsibility is to be guaranteed.
Privity: Privity of contract exists among those persons who actually took part in making the deal. These persons have special rights and duties because of their privity, including the right to enforce the contract. For example, a manufacturer and a seller may be “in privity,” but not the manufacturer and an ultimate buyer.
Probate: The legal process of administering estates of decedents, minors and incompetents.
Probate Bond: One that guarantees an honest accounting and faithful performance of duties by administrators, executors, trustees, guardians and other fiduciaries, so-called because such bonds are usually filed in a Probate Court.
Pro Forma Income Statement: A statement of revenue and expenses that includes some hypothetical values. It shows what could be expected to happen if a corporation decided to go through with a takeover, for example.
Producer: The term commonly applied to an agent, solicitor or other person who sells insurance or bonds, producing business for the company and a commission for himself.
Professional Liability Insurance: See Errors & Omissions.
Prohibited Risk: A risk of a class which the company will not entertain in any circumstances.
Project Neutral: See, Standing Neutral.
Promissory Estoppel: The principle that when Person A makes a promise and expects Person B to do something in reliance upon that promise, then Person B does act in reliance upon that promise, the law will usually help Person B enforce the promise because Person B has relied upon the promise to his or her detriment. Person A is “estopped” from breaking the promise even when there is no consideration to make the promise binding as part of a contract.
Prompt Payment Act: A law enacted in order to ensure that companies transacting business with the Government, or who are involved in the construction process, are paid in a timely manner.
Proof of Loss: A sworn statement by claimant setting forth details of his claim.
Property Code Bond: A payment bond written in favor of a private project owner in the State of Texas. Such bonds are governed by Subchapter I of Chapter 53 of the Texas Property Code. Payment bonds written to private owners in Texas will be construed to be written in accordance with the Property Code whether the Code Sections are referenced or not, and irrespective of inconsistent terms in the bond form.
Property Insurance: Insurance providing financial protection against the loss of, or damage to, real and personal property caused by such perils as fire, theft, windstorm, hail, explosion, riot, aircraft, motor vehicles, vandalism, malicious mischief, riot and civil commotion, and smoke.
Proportional (Pro Rata) Reinsurance: A form of reinsurance which obligates the ceding company automatically to cede and the reinsurer automatically to accept a share of risk in accordance with a “treaty” agreement. The two main types are “surplus” and “quota share.” Under a Surplus Liability Treaty, the reinsurer accepts only the surplus liability in excess of a predetermined limit and the reinsurer’s loss participation in the entire loss is in proportion to its share of the total coverage limit. Under a Quota Share Treaty, the primary company cedes and the reinsurer assumes a fixed percentage of every risk in the class of business defined in the treaty.
Pro Rate Cancellation: Computation of the return premium resulting from cancellation on a proportionate basis.
Public Official Bonds: These are afforded in four categories: Individual, Name Schedule, Position Schedule, and Public Employees Blanket bond and Public School System Employees Blanket Bond.
Punitive Damages: Special and highly exceptional damages ordered by a court against a defendant where the act or omission which caused the suit, was of a particularly heinous, malicious or highhanded nature. Where awarded, they are an exception to the rule that damages are to compensate not to punish. The exact threshold of punitive damages varies from jurisdiction to jurisdiction. In some countries, and in certain circumstances, punitive damages might even be available for breach of contract cases but, again, only for the exceptional cases where the court wants to give a strong message to the community that similar conduct will be severely punished.
Qualifying Limit: The largest net amount that a surety company may retain. The Qualifying Limit for bonds filed with the Federal Government is established annually by the U.S. Treasury Department. Several states also establish Qualifying Limits applicable to bonds filed in their particular jurisdictions.
Qualifying Power: The largest net amount of risk which may be carried by a surety company on a bond.
Quia Timet: A Bill Quia Timet is an equitable proceeding used to guard against possible or prospective injuries and the preserve the means by which existing rights are protected from future or contingent violations. It differs from an injunction, which corrects past and present – or imminent and certain – injuries. This type of action might be filed by a surety to protect its interests in advance of an actual default.
RMA Annual Statement Studies: (Robert Morris Associates) The Statement Studies contain composite financial data on manufacturing, wholesaling, retailing, service, and contracting lines of business. Financial statements on each industry are shown in common size form, and are accompanied by widely used ratios.
Rate: The cost of a unit of insurance. In surety bonds, the rate is usually the cost per each $1,000 of coverage.
Rate Manual: A compendium that lists, among other items, the rates established for individual risks, e.g. The Rate Manual of Fidelity, Forgery & Surety Bonds of the Surety Association of America.
Ratification Agreement: As soon as the surety begins to seriously entertain selection of the takeover option, it will take steps to protect against inflating completion costs. In many instances, most of the bonded work will actually be performed by subcontractors and a significant portion of the overall contract price will relate to materials furnished by suppliers. The surety will negotiate agreements with the subcontractors and suppliers to the bonded principal, offering prompt payment in return for a commitment to continue performance at the prices originally offered to the principal. This practice has been termed as the “ratification process.” Essentially, the surety binds itself to make payment to a given subcontractor or supplier in consideration for that supplier’s separate agreement to perform its portion of the bonded work in accordance with its prior agreement with the principal. the ratification agreement typically provides for the surety’s right to assign the agreement to a replacement contractor. Similarly, termination provisions are usually included should the surety elect not to complete the work. Finally, the agreement will provide for an assignment to the surety of all of the subcontractor’s or supplier’s claims against the principal, to the extent of the consideration given by the surety under the agreement.
Rating Bureau: An organization which files rates with state supervisory authorities for those member companies authorizing it to do so.
Rebate: Giving to the policy holder or principal some part of the premium, agent’s commission, or something of value as an inducement to buy. Rebates are not allowed under many insurance laws unless they are approved under a rate filing.
Receiver: One appointed by a court to take custody of property.
Recital: The portion of a surety bond usually commencing with the word “Whereas” which describes the transaction for wich the bond is given. In the case of a guarantee of a contract it generally incorporates the contract by reference.
Reclamation Bond : Guarantees an organization will restore land after a project to its original state.
Recovery: Reimbursement received by a surety from a reinsurer, by subrogation, or from salvage following a loss.
Redelivery Bond: Substantially the same as a Forthcoming Bond.
Refunding Bond-Rate Litigation: This term is applicable to any bond conditioned for future return, if ordered, or money which the principal was allowed to charge and retain pending the final determination or decision in a contested matter.
Registered Agent: Virtually every state requires all corporations and limited liability companies (LLC) to appoint a Registered Agent. Most states require the Registered Agent to be physically located in the state of incorporation or qualification. If you fail to appoint a Registered Agent, then the state will take steps to prevent you from being able to do business in that state. A Registered Agent is an entity that is responsible for receiving important legal and tax documents for your corporation or LLC, which may include: notice of litigation (service of process), franchise tax forms and annual report notices. Your Registered Agent address is a matter of public record. Each state wants to make sure that its citizens and businesses have a way to contact you in the event they have a potential claim against you. Without a Registered Agent to receive legal process on your behalf, you could be defaulted for failing to answer the claim in a timely fashion.
Reinsurance: A form of insurance that insurance/surety companies buy for their own protection – a sharing of insurance. An insurer/surety (the reinsured) reduces its possible maximum loss on either an individual risk (facultative) or on a large number of risks (treaty) by giving (ceding) a portion of its liability to another insurance/surety company (reinsurer).
Reinsured: An insurance/surety company which originates an insurance policy/surety bond and cedes a portion of the liability to another company (reinsurer).
Reinsurer: An insurance/surety company which assumes all or part of an insurance policy/ surety bond written by a primary insurance/surety company (ceding company).
Release: To give up or abandon an enforceable right. The document evidencing such act.
Removal Bond: Where a case originally bought into a state court is removed to the federal court, and the defendant is required to give bond for the payment of costs in federal court if the case is found to have been improperly removed. A similar bond may be required on the removal of a case from one state court to another.
Renewal: Continuance of a bond or policy for a subsequent premium term.
Replevin: A legal action to recover property taken or unlawfully detained.
Replevin-Plaintiff’s Bond to Secure: Replevin is an action to recover possession of specific articles or personal property. The replevin bond, which the plaintiff is required to furnish, is conditioned for the return of the property, return is ordered, and for the payment of all costs and damages adjudged to the defendant.
Retainage: Funds that are earned by the contractor but not paid until some agreed upon date, such as the completion of the job. These funds, usually 5 to 10% of the contract amount are retained for a variety of reasons; as an incentive to complete the job in a timely manner, or as a fund for the benefit of suppliers and subcontractors.
Retention: The portion of a reinsured risk that the originating insurance/surety company does not cede to the reinsurer.
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.
Retrospective Rating: Rating procedure which allows adjustment of an insured’s final rate on the basis of the insured’s own loss experience
Return on Net Worth: A financial ratio that measures the profit return on the investment , the reward for the assumption of ownership risk
Rider: An attachment to a bond that modifies its conditions by expanding or restricting benefits or excluding certain conditions from coverage.
Risk: Any chance of loss. The insured or the property to which the bond relates.
Sales to Working Capital: A ratio of annual revenue to working capital that measures to what extent the company’s sales volume is supported by the working capital.
Salvage: The value of property after it has been partially damaged by fire, malicious mischief or other perils. In suretyship, salvage is that which is recovered from the principal or indemnitor to offset the loss and expense paid by a surety in satisfying its obligations under a bond.
Savings Clause: In a dual obligee rider, the savings clause requires the additional named obligee to fulfill the contractual obligations of the contract in order to invoke the performance features of the bond
SBA: An acronym for the Small Business Administration. The SBA has a program to help small and minority owned contracting businesses obtain surety bonds.
Scope of Authority, Agent’s: Performance of duties which were expressly or impliedly assigned to the agent by the principal.
Securities: Certificates evidencing debts or shares of ownership.
Sequestration Bond: Substantially the same as Attachment Bond-Plaintiff’s.
Settlement Agreement: In a civil lawsuit, the document that spells out the terms of an out-of-court compromise.
Severability Clause: A provision that keeps the remaining provisions of a contract or statute in force if any portion of that contract or statute is declared void or unconstitutional.
Shareholder Agreement: A contract between the shareholders of the company and the company itself, in which certain things, usually the purview of the board of directors, are detailed. For example, a shareholder might be allowed to manage the company, instead of a board of directors. The shareholder agreement will also, typically, control inflows to the company (purchase of shares), how profits are to be distributed, dispute resolution and what to do if a shareholder dies.
Sheshunoff Bank, and Sheshunoff S&L: This reference guide provides summary financial statistics on Commercial Banks and Savings and Loans respectively. The guide is organized by state and city. A financial rating is made available based on an interpretation of the financial strength of the bank or S&L. This guide is available in the Home Office and comes out quarterly.
Short Rate-Short Rate Cancellation: The charge required for bonds taken for less than a year, and in some cases, the earned premium for bonds canceled by the insured before the end of the term of the bond; i.e., the earned premium plus an expense charge.
Short-Term Bonds: Those covering fiduciaries whose duties are to collect the assets of the decedent, pay the debts and distribute the remainder according to law. The terms of these fiduciaries are usually brief. (See “Long Term bond.”)
Silent Joint Venture: A silent joint venture involves an undisclosed venture partner.
Silent Partner: A person who invests in a company or partnership but does not take part in administering or directing the organization; he or she just shares in the profits or losses.
Soft Costs: Soft Costs are cost items in addition to the direct Construction Cost. Soft Costs generally include architectural and engineering, legal, permits and fees, financing fees, construction Interest and operating expenses, leasing and real estate commissions, advertising and promotion, and supervision.
Soft Market: That part of the insurance sales cycle in which competition is at a maximum as insurance companies use their excess capacity to sell more policies at lower prices. See also Hard market.
Sovereign Immunity: The government’s freedom from being sued. In many cases, the U.S. government has waived immunity by a statute such as the Federal Tort Claims Act.
Spearin Doctrine: The federal courts have created a doctrine whereby an owner impliedly warrants the information, plans and specifications which an owner provides to a general contractor. This doctrine, entitled the Spearin doctrine, arises from the case of United States v. Spearin, 248 U.S. 132 (1918), and maintains that a contractor will not be liable to the owner for loss or damage which results solely from insufficiencies or defects in such information, plans and specifications.
Stack/Cumulative Liability: This occurs when a bond has a definite expiration date and a new bond must be filed for each successive term. Each bond carries a new bond penalty, thus “stacking” the bond liability from year to year.
Standard & Poor’s (S&P) and Moody’s: Both S&P and Moody’s are independent companies that provide ratings on a company’s ability to pay their outstanding debt (i.e. commercial bonds). The ratings are based on an analysis of a given company’s financial condition. The higher the rating the higher the level of confidence that they will fund their debt obligations as agreed. The ratings are provided from an investment perspective and are updated monthly. Most publicly traded companies are rated. These publications are available from Home Office and most local libraries.
Standing Neutral: A construction dispute avoidance technique involving the selection of a third party, often one or more industry professionals or contract/claims experts, to serve the parties as an observer, fact finder and dispute resolver. Sometimes called a “project neutral,” the standing neutral provides ongoing dispute prevention services, reviews and assesses disputes, conducts neutral fact-finding and efficiently and economically guides the parties through the resolution process.
Status Inquiry Letter: Most surety companies routinely send out job status inquiries obligees to monitor the progress of the contracts they have bonded. Sureties are keenly interested in the progress of work on bonded projects. It is not practical, or even physically possible, to visit all bonded jobs on a regular basis, so the job status inquiry is the next best thing. Most of the time, the responses to these inquiries report satisfactory performance. In those situations where that is not the case, however, they can be an early warning of a looming problem. When a surety is notified of a problem early on, it may be in a position to help the subcontractor and prevent the problem from becoming a major disaster. Principals may be reluctant to inform the surety about a problem for fear of that knowledge resulting in a curtailment of their surety credit. Thus, the job status inquiry gives the obligee a reasonable means of communicating with a principal’s surety. Principals should keep in mind that the obligee has a right, and in some cases, a duty, to communicate with the surety about unsatisfactory performance.
Statute: A law enacted by a legislature.
Statute of Limitations: A law that sets a maximum amount of time after something happens for it to be taken to court, such as a “four-year statute” for lawsuits based on a contract, or a “one-year statute” for a claim on a payment bond claim. These statutes vary from state to state.
Statute of Repose: Sometimes called “completion statutes,” a statute of repose is an outside date, typically running from the date of completion of a project, after which parties involved in a construction project would have no further liability. Statues of Repose arose to deal with the difficulties in determining when a cause of action arose, and was therefore barred by a statute of limitations, because of discovery of defects many years after project completion.
Statutory: Required by, or having to do with, a law or statute.
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.
Statute of Repose: Sometimes called “completion statutes,” a statute of repose is an outside date, typically running from the date of completion of a project, after which parties involved in a construction project would have no further liability. Statues of Repose arose to deal with the difficulties in determining when a cause of action arose, and was therefore barred by a statute of limitations, because of discovery of defects many years after project completion.
Statutory Retainage: Retainage required to be withheld by an owner from a prime contractor. In Texas, an owner is required to retain 10% from each progress payment to a general contractor, and to hold that retainage until 30 days following final completion of the project. General contractors furnishing Property Code bonds are exempt from this statutory requirement. There is no requirement for retainage on Public Works in Texas, and statutes mandate that interest be paid by the public owner if retainage exceeds 5% of the contract amount in certain circumstances.
Statutory Warranty Deed: A warranty deed form prescribed by some state statutes.
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.
Step or Multi-Step Dispute Resolution: Parties may agree, either when a specific dispute arises, or earlier in a contract clause between business venturers, to engage in a progressive series of dispute resolution procedures. One step typically is some form of negotiation, preferably face-to-face between the parties. If unsuccessful, a second tier of negotiation between higher levels of executives may resolve the matter. The next step may be mediation or another facilitated settlement effort. If no resolution has been reached at any of the earlier stages, the agreement can provide for a binding resolution through arbitration, private adjudication or litigation. One form of multi-step ADR is the wise man procedure, typically used when problems arise in long-term partnerships such as those in the oil and gas industry. Sometimes called “progressive negotiation” or “mutual escalation,” this procedure refers matters first to a partnership committee which oversees the day-to-day operations of the project. If the problem cannot be resolved at that level, the wise-man option the next ADR step is employed. The wise men (or women) are respected senior executives of each company who are uninvolved in the project. These officials are given a fairly short time frame (sometimes just 30 days) to investigate the dispute. If that fails, the matter goes to a third step, usually binding arbitration. While pioneered in the oil industry, the wise man approach could also be useful in the high-technology field and other areas involving close and continuing business relationships.
Stipulated Sum Contract: An agreement in which a specific amount is set forth as the total payment for performance of the contract. See, lump sum contract.
Stipulation for Value or Limitation of Liability: The release of a libeled ship is something effected by the owner giving a stipulation for value in an agreed amount or, if claims exceed the value of the ship, by giving stipulation for limitation of liability in an amount fixed by the court based on an appraisal of the ship, conditioned by paying any sum awarded by final decree not exceeding the amount of the stipulation.
Stop loss (excess of loss ratio): A form of protection which makes it possible to limit the loss ratio on a year of account to an agreed percentage of the original insured’s premium income on business protected. Personal stop loss reinsurances are also used by individual members to obtain a measure of protection against an overall underwriting loss on any one year of account.
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 wil pay for labor and material incurred in the prosecution of the subcontracted work.
Subcontractor Default Insurance: See, Contractor Default Insurance
Subdivision Bond: One guaranteeing that a developer of a subdivision will, within a specified period, construct improvements on the property, such as streets, sidewalks, curbs, gutters, sewers, etc. at his own expense.
Submission: The presentation of underwriting data to one with the necessary authority to act.
Subrogation: The surrender of rights by an insured against a third party to an insurance company that has paid a claim
Substantial Completion: Unless a contract provides a different definition, substantial completion is generally understood to occur when a project is sufficiently complete to allow it to be used for its intended purpose, despite some work still needing to be done (such as work enumerated on a punch list.)
Summary Judgment: A final decision by a judge that resolves a lawsuit in favor of one of the parties. A motion for summary judgment is made after discovery is completed but before the case goes to trial. The party making the motion marshals all the evidence in its favor, compares it to the other side’s evidence, and argues that a reasonable jury looking at the same evidence could only decide the case one way–for the moving party. If the judge agrees, then a trial would be unnecessary and the judge enters judgment for the moving party.
Summary Jury Trial: An ADR procedure wherein each side puts on an abbreviated summary of its case to six jurors selected from the jury roster. The jurors do not know and are not told that their verdict on liability and damages is purely advisory. The premise behind this ADR method is that the parties get a glimpse of what a jury might do in their case.
Supersede: To replace.
Supersedeas: A writ staying execution of a judgment pending appeal.
Supplementary Conditions: A written section of the contract documents supplementing and qualifying or modifying the contracts general conditions.
Supply Bond: An agreement providing for monetary compensation should there be a failure to perform specified acts within stated period
Surety: A person or corporation collaterally bound for the payment of money or the performance of an act or duty by another.
Surety Association of America (SAA): An association composed of leading capital stock insurance companies which engage in Fidelity, Surety and Forgery Bond Underwriting. It establishes the classifications of risks. It also creates standard forms, provisions, riders and miscellaneous other forms. It collects and analyses statistical data, makes filings with regulatory authorities in behalf of its members and performs other functions for the benefit of its members and subscribers and for their insured.
Surety Bond: A three party agreement whereby one party (the surety) is bound with the person bonded (the principal) to a third party (the obligee). The bond guarantees the surety’s performance or monetary compensation to the obligee should there be a failure by the principal to perform specified acts within a stated time period.
Surety Credit: Contractors qualify for surety credit following an analysis of their financial statements, integrity and abilities by the surety underwriter. The line of surety credit is usually stated in terms of largest single job that the surety will underwrite and the total work program (bonded and un-bonded) that the surety will support.
Surety Information Office: The Surety Information Office (SIO) is the information source on surety bonds. SIO was formed in 1993 to disseminate information about the benefits of contract surety bonds in public and private construction. SIO is supported by the National Association of Surety Bond Producers (NASBP) [member agents and brokers]and The Surety Association of America (SAA) [member surety companies]. SIO’s mission is “to increase the use of contract surety bonds in the private sector, and foster dissemination of positive information on the important role of corporate suretyship in public and private construction.” SIO works closely with a network of 46 Local Surety Associations (LSA) nationwide. Many of these Associations have formed Public Information Task Forces to educate audiences on how surety bonds are used in construction to prevent contractor default.
Surety Support Programs: A Surety Support or Mentor/Protégé program offers program participants, usually small and disadvantaged businesses, the ability to complete projects as a better, more sophisticated firm, capable of tackling larger projects in the future. The goal is to help the firms get approved for surety bonds and thus create a bond track record for them, which is important for their future projects. The mentoring process may include training in areas such as accounting, financial management, surety, and safety.
Surety Technical Assistance Services: A type of surety support program mandated by the General Services Commission of Texas.
Surety Underwriter: An employee of the surety company who evaluates applications for surety bonds and determines the terms under which the applicant will be bonded.
Surplus Lines: Coverage procured in an unlicensed or non-admitted insurance company because of its unavailability in the licensed and admitted market.
Sworn Statement: A statement given under oath; an affidavit.
Takeover Agreement: The “takeover” agreement, whereby the surety binds itself to continue performance of the bonded contract, is the management tool utilized by the surety in executing the option. Regardless of the particular method of completing the work, i.e. whether by awarding a lump sum, “cost plus” or construction management completion contract, the takeover agreement is the vehicle used by the surety in making its determination as to what is to be done for the obligee, how fast it is to get done, and what the surety will receive in return for doing it.
Takeover by Surety: The takeover option occurs whenever a surety, upon default of its principal, enters into an agreement, or by its conduct agrees to “take over” the remaining performance obligations of its principal. Similar to selection of the financing option, the surety contemplating a takeover of the bonded work is confronted with a myriad of concerns: (1) preservation of its bond penalty ; (2) preservation of its indemnity rights in the face of its principal’s protestations concerning the costs being incurred to complete the work; (3) dealing with uncooperative owners and vendors to its principal; (4) holding down the continuing expense of administering completion; (5) the pressing time constraints of delay damage assertions; and (6) the timely collection of the available contract funds and retainages. The principal advantage afforded by the takeover option is the control afforded to the surety over its potential loss. Presumably, the surety will select a replacement contractor(s) with greater present capabilities than the principal. Further, to the extent the replacement contractor undertakes the obligations of the bonded contract, for a fixed price, the surety is able to fix its loss.
Tender Option: When a default termination occurs at an early stage of the project, the surety may consider tendering a sum of money to the obligee in full and final settlement of all claims.
Term: A period of time for which a bond or policy is issued.
Termination: Generally, the process of terminating a contract, usually as the result of the default of one of the parties.
Termination for Convenience: Termination, usually pursuant to a contract clause, or by agreement of the parties after the execution of a contract, which is not for cause or default, but for the convenience of one of the parties. When a contract is terminated for convenience, the contractor is usually paid for the value of the work performed and some portion of his earned or anticipated profit and overhead.
Testamentary: Of or relating to a will.
Testator: One who dies leaving a valid will.
Three C’s: All applicants for Surety bonds must meet the underwriting standards for what are often referred to as the “Three C’s”: Character: applicant’s standing and reputation are such to warrant the conclusion that they are of good character and worthy of trust; Capacity: if the obligation entered into by the applicant requires particular skills or ability in its performance, the applicant should possess those necessary skills and ability; and Capital: the applicant should be solvent and would be unlikely to commit dishonest act or perform inefficiently because of strained financial resources.
Third Party Liability: A bond provision that provides third parties the right to make claim against the surety bond. This increases the surety’s exposure and may result in small nuisance claims.
Time is of the Essence: A phrase used in a contract to make timeliness of performing a contractual promise material, thus making a failure to do what is required by the time specified a breach of the contract.
Total Cost Method: A method by which a contractor seeks to prove its damages by comparing the costs of performance with what the contractor contends should have been the cost of the project. Compare to Modified Total Cost Method
Treasury Limits: These are qualifying limits imposed upon the surety by the United States Treasury Department. To be an acceptable surety on bonds in favor of the U.S., the surety must qualify financially under regulations of the Treasury Department. It compiles an annual list of the companies who are qualified, the underwriting limit of each and other pertinent data.
Treasury Listing : A federal limit on the size of federal bond a surety may write.
Treaty Reinsurance: An agreement between parties in which one company agrees to automatically cede a portion of all business outlined in the agreement to the other party (reinsurer), and the reinsurer agrees to accept such business.
Trust Fund Statute: Chapter 162 of the Texas Property Code declares construction payments and loan receipts for improvement of real property trust funds and provides for certain penalties for the misapplication of such funds.
Trustee: One holding property belonging to and for the use of another.
Undertaking: This is similar to a bond except it is a two party agreement between the surety and the obligee – The principal is not named on the form. Under such an agreement, the obligee can make demand on the surety without first looking to the principal for action.
Underwriter: An individual or employee of an insurance company who determines which risk to accept and the amount of such risks.
Uniform Commercial Code: A codification of the law merchant adopted by many states.
Unilateral: By one party only.
Unit Price Contract: A contract which provides the owner pay the contractor a specified amount of money for each unit of work completed in the performance of a contract. Usually, this is used in situations where precise quantities cannot be predetermined.
Value Engineering: A design review process involving critical evaluation of elements of a building to determine the relative value to the owner of the specified product or system compared to alternative products or systems. Life-cycle costing and constructability studies may be parts of the value engineering process.
Value Line Investment Survey: Value Line is an independent company that maintains information on larger, publicly traded companies, primarily those traded on the New York and American Stock Exchanges. Reports are updated quarterly. The information provided includes a synopsis of the company’s operations and financial trends and is geared towards investors. Home Office maintains a subscription to Value Line, and most libraries retain copies in their reference collections.
Waiver: When a person disclaims or renounces to a right that they may have otherwise had. Waivers are not always in writing. Sometimes a person’s actions can be interpreted as a waiver.
Ward: One under guardianship.
Warranty: An undertaking or stipulation that certain facts are as stated.
Will: A document disposing of property upon death.
Without Prejudice: This clause is often seen on court judgements, motions or orders of decree. It is meant as a declaration that no rights/privileges of the parties concerned are to be considered waved or lost. If a case is dismissed “without prejudice,” a new suit can be brought on the same cause or action. A Document with this phrase is not sufficient evidence to cancel a court bond.
Workers’ Compensation Insurance: Insurance against liability imposed on certain employers to pay benefits and furnish care to employees injured, and to pay benefits to dependents of employees killed in the course of or arising out of their employment.
Work-on-Hand : Reports Financial statement showing a contractor’s work in progress.
Wrap Up Insurance: One policy of insurance to cover all exposures on an entire project, usually purchased by the owner; more common on larger projects
Writ: An order issued in the name of a court.
X, C and U Exclusions: Exclusions to property liability forms aimed principally at contractors and excavators. The exclusions deny payment for loss due to Explosion (“X”), Collapse (“C”) or Underground Damage (“U”). Explosion includes property damage arising from blasting or explosion. Collapse includes structural property damage and property damage to any other property rising out of grading of land, excavating, burrowing, filling or backfilling, tunneling, pile driving, or coffer dam or caisson work, or moving, shoring, underpinning, razing or demolishing any building or structure. Underground damage includes damage to wires, conduits, pipes, mains, sewers, tanks, tunnels, or any similar property beneath the surface of the ground or water caused by and occurring during the use of mechanical equipment for the purpose of grading land, paving, excavating, drilling, burrowing, filling, backfilling, or pile driving.