Chapter 5 - Surety

Question 1

Define surety

Answer 1

The state of being sure, certain and secure

Question 2

Define suretyship

Answer 2

A guaranteed performance made by one person for another

Question 3

Identify 2 main classes of bonds issued by surety companies

Answer 3

1. Personal suretyship
2. Corporate suretyship

Question 4

What is the purpose of a fidelity bond

Answer 4

Ensures they will be protected for dishonest acts of the employees

Question 5

Explain the purpose of a surety bond

Answer 5

The undertaking of one party, to become accountable to another party, for the performance of an obligation or undertaking by a third party

Question 6

Discuss the three factors relating to the principal that form the basis of credit appraisal

Answer 6

1. Character: surety must ensure that the principal is of good character
2. Capacity: surety must be satisfied that the principal has knowledge, and experience necessary to do job
3. Capital: principal must be financially capable of completing work on hand

Question 7

State two benefits of suretyship

Answer 7

For principals: added confidence gained from the fact that the surety is satisfied in their ability

For obligees: provides them with confidence needed to undertake various projects

Question 8

Identify three parties to to any surety agreement

Answer 8

1. The principal: the person primarily liable
2. The Obligee: the party to whom someone else is obligated under contract
3. Surety: one who undertakes to pay money or to do any other act in the event that his principal fails therein

Question 9

Identify three important characteristics of the guarantee made by the surety

Answer 9

A) is a promise made to the obligee and not the principal
B) is a secondary obligation arising only on the default of the principal
C) surety’s duty to pay arises immediately upon default of the principal

Question 10

Identify two methods available to the surety to collect the amounts owed by the principal

Answer 10

1. Assignment to surety of obligees rights (

Question 11

Summarize common characteristics of a surety bond

Answer 11

1. Three party contract
2. Principal liable to surety
3. No losses expected
4. Intermediate length and non-cancellable
5. Statutory or non-statutory in form
6. Bond limit or penalty
7. Bond premium
8. Written contract

Question 12

Identify 3 differences between suretyship and insurance contracts

Answer 12

1. Surety agreement are 3 party’s- insurance contracts are 2
2. Surety is based on extension of credit without risk, with no losses expected. Insurance anticipates loss
3. Oral contracts are not binding, oral contracts are binding in insurance

Question 13

Define bond limit (penalty)

Answer 13

The amount of credit given to the principal

Question 14

Define obligee

Answer 14

The party to whom someone else is obligated under a contract

Question 15

Define principal

Answer 15

Under law of guarantee and suretyship, the party primary liable

Question 16

Define the surety in the contract

Answer 16

One who guarantees to pay money or to do any other act in the event the principal fails therein

Question 17

Identify 4 categories of surety bonds used to address the different obligations of principals

Answer 17

Contract bonds
Judicial bonds
License and permit bonds
Miscellaneous bonds

Question 18

Identify three risks common to owners when undertaking a construction project without the protection of bonds

Answer 18

• refusal or inability of successful bidder to enter in a contract
• failure of the contractor to complete the project at the contract price
• inability of the contractor to pay subcontractors and suppliers

Question 19

Outline four factors considered by a general contractor when deciding whether a subcontractor should be bonded

Answer 19

1. Terms of contract
2. Relationship between contractor and subcontractor
3. Value of the subcontract
4. Sub-trades price in relation to other bidders

Question 20

Explain the “bond limit or penalty” characteristic

Answer 20

-reflects the amount of credit given to the principal by the surety
- the penalty of bond does not change or reduce during contract

Question 21

Why would an owner need a contract bond

Answer 21

1. Refusal or inability of successful bidder to enter into contract
2. Failure of contractor to complete a project at contract price
3. Inability of the contractor to pay subcontractors

Question 22

What are the four types of construction bonds

Answer 22

1. Bid bonds
2. Performance bonds
3. Labour and material bonds
4. Maintenance bonds

Question 23

Identify 4 factors considered by a general contractor when deciding if a subcontractor should be bonded

Answer 23

1. Terms of contract
2. Relationship between the contractor and subcontractor
3. Value of the subcontract
4. Sub-trades price in relation to other bidders

Question 24

Explain a bid bond

Answer 24

Surety guarantees the obligee that the principal can and will enter in to a contract to preform the work at the tendered price

Question 25

Explain a performance bond

Answer 25

Guarantees the actual performance of the contract in accordance with the terms and conditions, and that faulty work will be corrected and defective materials will be replaced for a one year period

Question 26

Explain the Labour and Material payment bond

Answer 26

Guarantees that sub-trades and suppliers will be paid for the work and materials that enter in the project

Question 27

Explain a maintenance bond

Answer 27

Guarantees that the principal will fulfill the warranty obligations stated in the contract

Question 28

What is a common reason for defaulting under bid and performance bonds

Answer 28

Errors judgement and mistakes in arithmetic

Question 29

Discuss th bond limit or penalty provided on a performance bond

Answer 29

While 100% performance bonds are available, 50% bonds usually provide a sufficient guarantee and are most common

Question 30

Discuss th bond limit or penalty provided on a labour and material payment bond

Answer 30

Bond is issued in conjunction with and for same limits as a performance bond

Question 31

Discuss th bond limit or penalty provided on a maintenance bond

Answer 31

A separate maintenance bond is usually required when the contract has a warranty period beyond the standard one-year term. The obligee will indicate the bond limit required

Question 32

Identify the 3 main items of information of most interest to surety underwriters when reviewing the contractors financial statement

Answer 32

1. Working capital 2. Net worth 3. Profitability

Question 33

Explain the three types of guarantees provided by license and permit bonds

Answer 33

1. Compliance guarantees: provides basic guarantee the principal will comply with the laws that affect them 2. Financial guarantees: protects the government body that granted the license or permit against monetary damages resulting from the failure of licensees to comply with statutes 3. Indemnity guarantees: extents the provisions contained in the above bonds to third parties

Question 34

What would a client need to do to open a bond account with a surety

Answer 34

1. Submit broad range of information to the surety company including - history - financial strength of owners - organization chart - corporate structures -personal resumes - banking information - principal suppliers - business plan

Question 35

Define “contract bond”

Answer 35

A surety bond guaranteeing the performance of a contract

Question 36

Define license

Answer 36

Permission to do something

Question 37

Define net worth

Answer 37

An amount of money remaining after all assets have been liquidated and all liabilities cleared

Question 38

Define non-statutory bond

Answer 38

Not required by law but flows from the contract or agreement between parties

Question 39

Define permit

Answer 39

A document that grants one the right to do something

Question 40

Define statutory bond

Answer 40

A bond that’s required by statute

Question 41

Define working capital

Answer 41

The difference between current assets and current liabilities

Question 42

Identify two methods available to the surety to collect amounts owed to it by the principal

Answer 42

1. Assignment to the surety of the obligees right 2. Right of subrogation

Question 43

What is a supply bond

Answer 43

that guarantees a supplier will deliver goods, materials, or equipment as promised in a contract

Question 44

Identify two guarantees of the bid bond to the project owner

Answer 44

1. The principal will not withdraw the bid during the period specified. 2. The surety guarantees that if the principal refuses the job, it will compensate the owner

Question 45

Identify three reasons why certified cheques, although allowed, are not recommended as tender deposits

Answer 45

1. Ties up contractor’s funds, which can limit cash flow. 2. Do not guarantee contract performance, unlike a bid bond backed by a surety. 3. No protection for the owner if the contractor refuses to sign the contract or provide a performance bond

Question 46

Briefly explain the function of a surety’s consent

Answer 46

a written commitment from a surety that it will issue the required performance and/or labour and material payment bonds if the contractor is awarded the contract

Question 47

Briefly explain what is required to transpire before a bid is forfeit

Answer 47

1. The contractor must be formally awarded the contract (i.e., the bid is accepted), 2. And then the contractor must fail to meet the conditions, such as signing the contract or providing required bonds