CAIB 3 - Chapter 5 - Surety Bonds
A Bank Letter of Reference will be required by the surety, defining the relationship
the contractor has with the bank and how the line of credit is established. Specific
details outlining what might be requested? - ANS-1. Amount of line of credit and
amount currently in use.
2. Identification of type of security held on line of credit.
3. Average account balances.
4. Commentary on the general operation of the account and the length of time the
contractor has been dealing with the bank.
\A claim under a contractor's performance bond may arise as a result of what
defaults? - ANS-1. Involuntary Default
2. Voluntary Default
\Administrators and Executors Bond - ANS-The most common fiduciary bond. It
guarantees faithful performance of the administration, according to law, of a
deceased person's estate.
\Appeal Bond - ANS-Required of a plaintiff who did not obtain the remedy that was
sought and desires to appeal to a higher court. The bond guarantees the payment of
all court costs on the appeal.
\Before opening a bond account, the surety company will require what broad range
of information be provided by the contractor? - ANS-1. History of the company.
2. Financial strength of owners.
3. Organization Chart which defines responsibilities of the shareholders.
4. Corporate Structure - incorporated vs partnerships or proprietorships.
5. Key Personnel Resumes.
6. Banking Information.
7. Accounting Information.
8. Surety Information.
9. Completed Work Record.
10. Work in Progress Record.
11. Fixed Asset Schedule.
12. Principal Suppliers.
13. Insurances Carried.
14. Business Plan.
15. Receivables and Payables.
\Characteristics of Surety Bonds - ANS-1. Three party contract.
2. Principal liable to surety.
3. No losses expected.
4. Of indeterminate length and non-cancellable.
5. Statutory or non-statutory in form.
6. Bond limit (penalty).
7. Bond Premium.
, 8. Written Contract.
\Construction accounting allows for two different approaches to be used when
reporting income earned on "work in progress." What are these two methods? -
ANS-1. Completed contract method.
2. Percentage of completion method.
\Contractors must provide own guarantees. While the surety must be confident that
the contractor will not default, a back-up position is usually sought. This back-up
position can take many forms. What are these? - ANS-1. Indemnity Agreements -
allow the surety a right of action for all losses incurred by it in investigating, adjusting
and settling a claim against the defaulting contractor.
2. Third Party Indemnities - Co-signer
3. Collateral Security - can take the form of cash or letters of credit.
4. Subordination Agreements - aka Postponement Agreements. Provides the surety
with the guarantee that shareholder's loans to the company will remain in place until
the surety allows them to be paid out. The intent is to ensure that all bills are paid
before the shareholders are paid.
\Contracts of suretyship are not insurance contracts. Indeed, the differences
between them are substantial. What are the differences relating to insurance
contracts? - ANS-Insurance policies:
- are two party agreements
-anticipate losses occurring
-payment of losses is made directly to the insured and the insurer is not required to
be reimbursed by the insured
-the premium charged is based on current underwriting costs and future claims
expenses
-additional limits of insurance can routinely be added by the payment of an additional
premium
-are issued for specific periods of time and are cancellable by the insurer during the
policy period
-an oral agreement is just as binding on the parties to the contract as is a written
agreement
\Court bonds include all those bonds required in matters of litigation. Name 3 of
these bonds. - ANS-1. Release of Attachment Bond
2. Injunction Bond.
3. Appeal Bond.
\Customs and Excise Bonds - ANS-Guarantee payment of taxes and duties required
by the government for goods or services sold.
\Define Bond Limit (Penalty) - ANS-The amount of credit given to the principal by the
surety. This limit represents the amount of the penalty which the surety is prepared
to pay in the event the principal should default.
\Define Bond Premium - ANS-As surety writing does not contemplate losses
occurring, the sum charged for pre-qualification and other company expenses is
more appropriately described as a SERVICE FEE than a premium.
A Bank Letter of Reference will be required by the surety, defining the relationship
the contractor has with the bank and how the line of credit is established. Specific
details outlining what might be requested? - ANS-1. Amount of line of credit and
amount currently in use.
2. Identification of type of security held on line of credit.
3. Average account balances.
4. Commentary on the general operation of the account and the length of time the
contractor has been dealing with the bank.
\A claim under a contractor's performance bond may arise as a result of what
defaults? - ANS-1. Involuntary Default
2. Voluntary Default
\Administrators and Executors Bond - ANS-The most common fiduciary bond. It
guarantees faithful performance of the administration, according to law, of a
deceased person's estate.
\Appeal Bond - ANS-Required of a plaintiff who did not obtain the remedy that was
sought and desires to appeal to a higher court. The bond guarantees the payment of
all court costs on the appeal.
\Before opening a bond account, the surety company will require what broad range
of information be provided by the contractor? - ANS-1. History of the company.
2. Financial strength of owners.
3. Organization Chart which defines responsibilities of the shareholders.
4. Corporate Structure - incorporated vs partnerships or proprietorships.
5. Key Personnel Resumes.
6. Banking Information.
7. Accounting Information.
8. Surety Information.
9. Completed Work Record.
10. Work in Progress Record.
11. Fixed Asset Schedule.
12. Principal Suppliers.
13. Insurances Carried.
14. Business Plan.
15. Receivables and Payables.
\Characteristics of Surety Bonds - ANS-1. Three party contract.
2. Principal liable to surety.
3. No losses expected.
4. Of indeterminate length and non-cancellable.
5. Statutory or non-statutory in form.
6. Bond limit (penalty).
7. Bond Premium.
, 8. Written Contract.
\Construction accounting allows for two different approaches to be used when
reporting income earned on "work in progress." What are these two methods? -
ANS-1. Completed contract method.
2. Percentage of completion method.
\Contractors must provide own guarantees. While the surety must be confident that
the contractor will not default, a back-up position is usually sought. This back-up
position can take many forms. What are these? - ANS-1. Indemnity Agreements -
allow the surety a right of action for all losses incurred by it in investigating, adjusting
and settling a claim against the defaulting contractor.
2. Third Party Indemnities - Co-signer
3. Collateral Security - can take the form of cash or letters of credit.
4. Subordination Agreements - aka Postponement Agreements. Provides the surety
with the guarantee that shareholder's loans to the company will remain in place until
the surety allows them to be paid out. The intent is to ensure that all bills are paid
before the shareholders are paid.
\Contracts of suretyship are not insurance contracts. Indeed, the differences
between them are substantial. What are the differences relating to insurance
contracts? - ANS-Insurance policies:
- are two party agreements
-anticipate losses occurring
-payment of losses is made directly to the insured and the insurer is not required to
be reimbursed by the insured
-the premium charged is based on current underwriting costs and future claims
expenses
-additional limits of insurance can routinely be added by the payment of an additional
premium
-are issued for specific periods of time and are cancellable by the insurer during the
policy period
-an oral agreement is just as binding on the parties to the contract as is a written
agreement
\Court bonds include all those bonds required in matters of litigation. Name 3 of
these bonds. - ANS-1. Release of Attachment Bond
2. Injunction Bond.
3. Appeal Bond.
\Customs and Excise Bonds - ANS-Guarantee payment of taxes and duties required
by the government for goods or services sold.
\Define Bond Limit (Penalty) - ANS-The amount of credit given to the principal by the
surety. This limit represents the amount of the penalty which the surety is prepared
to pay in the event the principal should default.
\Define Bond Premium - ANS-As surety writing does not contemplate losses
occurring, the sum charged for pre-qualification and other company expenses is
more appropriately described as a SERVICE FEE than a premium.
