What the fiddlefwop is a surety bond and why should I care, you may ask. Good question: I was almost 40 before my life became entwined with these mysterious objects and I found myself adjusting surety claims. (My then husband did Operations Research. We both have unpronounceable and unspellable names. We spent a lot of time explaining ourselves at cocktail parties).
You many never have to care what a surety bond is. But you also may be or become one of the people whose profession requires one: a construction contractor, a vehicle dealer, a small business getting started that the state tax folks don’t trust, a notary, a broker of trucking services or a runner of exercise clubs, the owner of a hops storage facility, or (my all time favorite) an Arizona shooter-of-coyotes-from-airplanes. This list goes on: if you are in your own business that has much likelihood of state or federal regulation, you are likely to find your bookkeeper telling you that you need a bond. Or you may end up as the guardian for someone or as the executor of someone’s will, in which case it will be your lawyer who tells you.
Or, perhaps more important, you may someday find yourself in the position of being Righteously Rooked by someone in one of those professions. They screwed you, they owe you money, and they are broke. Aha! They have a surety bond. A Source of Repayment.
To get one thing straight, I am not talking Bail Bonds here. I know nothing from Bail Bonds. They have their own little corner of the industry but their general principles are much like what follows.
A surety bond is tangibly a piece of paper issued by an Insurance Company--duly stamped with a bumpy corporate seal--that you have to give to whoever it is who has the power to keep you from working without one. In it, the Surety (a.k.a. Bonding Company) promises to pay certain of your debts if you don’t. This includes damages people may claim because you screwed them over—sold them a stolen car, perhaps. You pay a premium to get a bond, just like your insurance. It is that simple. Seems cool, right?
Well, sort of. Don’t let the insurance premium bit mislead you. As we claims people sigh daily, A Bond Is Not Insurance. Basically, if the surety ends up paying one of your debts, you have to pay the surety back. It’s more like a back-up line of credit that only your creditors, not you, can draw on.
What’s more, one of the pieces of paper your bookkeeper or lawyer stuck in front of you to get the bond was likely an Agreement of Indemnity. In this, you promise the surety all sorts of things, not just as a business but individually. So if you thought forming a corporation would let you walk away from debts when things went bad, think again. The Agreement of Indemnity basically says you’ll pay the surety back. It also says that you will pay the surety’s attorney fees if you get in a pissing match with someone and the bond gets pulled into the fray. On larger construction bonds, it also gives the surety the right to pretty well take over your company if it feels that the way you are running it puts the surety at risk. This means that if you get a call or letter from someone who says “This is your Bonding Company’s Claims Department” you’d better respond.
If you are one of the Righteously Rooked, you may have a source of debt repayment. You make a bond claim. Whether or not you will get anywhere depends, first, on whether you are one of the creditors covered by the bond. That is generally determined by whatever statute it was that required the bond or, for some bonds, on what the bond itself says. For instance, in many states a person sold a lemon by a used car dealer can have a bond claim, but an auction who sold a car to that dealer and didn’t get paid for it does not have a bond claim. The Rooked auction is not a “bond beneficiary.”
Second, your debt also has to be one of the types covered by the bond. Generally, the debt has to be related to the business or, more narrowly, to aspects of the business that the legislature thought worth protecting. So if your gripe with a contractor is that you are his dentist and he didn’t pay, the bond is not for you. If you are a homeowner with a brand new leaky roof, it probably is for you.
Bonds sit in the background and gather premium when all is going well. When a dispute arises, bond claims are usually started by one of the Righteously Rooked sending a letter to the surety or suing it. At this point, Oh Rooked, another limitation comes into play. First, the bond is limited to a certain amount, stated in the bond (this is called the penal sum) and it limits the TOTAL amount that the surety has to pay. So if there is a horde of Righteously Rooked out there, you may only get a part of what you are due.
Second, just as the Bond Is Not Insurance, the Surety Is Not a Judge. We claims adjusters don’t wear black robes, and if there is a bona fide—or even arguable--dispute about whether the Principal (that’s the guy whose debts are guaranteed) owes the money, a bond claim isn’t a short cut around that dispute. The surety is quite likely to tell you to take your case to court and, if you win, come back and see us. In legalese, this is stated as “The Surety is entitled to any defenses of its Principal.” Whether YOU get your attorney fees out of the surety will depend on the bond, the statute governing it, and/or your contract with the Principal.
Because of this, bond claims often take longer than a claim on your homeowner’s insurance. The surety has to investigate both sides of the story (and believe me, Oh Righteous, there usually are two sides) and has to act fairly towards both the claimant AND the Principal—after all, the Principal will be sent a bill if the surety pays.
Surety claims is a fascinating corner of the Law. I have had a case where a contractor murdered his wife over their bills and I had to figure out how to make my own claim in probate. I had a case where it turned out that the car buyer’s car was impounded and crushed into a little cube not because he hadn’t got title yet but because he got caught stealing gas out of someone else’s storage tank to the level of Grand Larceny. And more times than I care to think about I have had to explain to some irate ex-wife that she signed the Indemnity Agreement and her divorce lawyer forgot to tell her that she had to notify the surety she was no longer responsible for the louse’s debts. So she still is.
And no, I have never had a claim by a shot coyote from Arizona. I don’t really know what that bond is all about. But it’s probably poppin’ good.