Suretypedia’s Guide to Bond Forms

Author: Suretypedia Team

Posted On: 11-19-2019

Surety bonds are among the oldest contracts in the world; however, they are often misunderstood in the insurance marketplace. The agreement underlying a surety relationship is known as a “Bond Form.” This article seeks to provide the ins and outs of the parties, structure and language privy to this often confusing document. 


What is a Bond Form? 
 

A bond form is a contractual obligation between the Principal, Surety & Obligee, which have the following roles within the agreement:

The bond form dictates conditions the parties must adhere to and guarantees payment to the Obligee should the principal fail to satisfy any of its obligations under the bond. Bond forms, unlike most contracts, are non-negotiable agreements typically created solely by the Obligee. While this gives the Obligee the ability to write the Bond Form in ways that favor those who may suffer losses caused by the principal, Obligees often seek feedback from sureties and other industry groups on provisions that are enticing to Principals and Sureties as well. 
 

What’s in a Bond Form?
 

Although bond forms are written by the Obligee and may contain specific language related to the bond requirement, most bonds share common language that sets forth the obligations and/or rights of the three parties. The typical conditions are known as General Clauses, the most common of which are described below:
 

What if the Obligee Doesn’t Have a Specific Bond Form?? 
 

You may need a “Generic” bond form. As the term implies, generic bond forms are templated forms which can be tailored for a variety of bond requirements. Typically, these forms are used when municipalities do not have bond forms available for a specific requirement. Generic bond forms are often crafted by the Surety company, rather than the Obligee and, as such, generally have language that is more favorable to the Surety. The Surety’s generic form should be reviewed by the Obligee prior to issuance of the bond so they can verify the form is acceptable. Much like Obligees, Sureties write their generic forms on a take it or leave it basis. 
 

Why do Surety Companies Underwrite Some Bonds Differently than Others?


Surety companies may employ more stringent underwriting on certain bonds because the limit is higher or the activity necessitating the bond is inherently more risky. However, when these conditions are roughly the same, you may want to dig a little deeper into the language of the bond form. Onerous conditions, such as the ones cited below, increase the risk that the Surety will pay claims and expenses in excess of the premiums generated on that class of bond. It is still possible to obtain bonds containing these conditions; however, Sureties may be more conservative in their underwriting dependent on the condition. Below is a list of onerous conditions seen frequently in the marketplace along with links to specific bond examples containing the provisions:

 

To Recap:

Bond forms are non-negotiable contractual obligations between three parties (Principal, Obligee & Surety) and dictate the agreement the Principal must adhere to. There are a wide variety of different bond types; however, most bonds follow a standard set of guidelines which help to form its underlying agreement. A majority of bonds have specific forms, but in some cases a generic forms created by the Surety may satisfy the requiring entity. Lastly, some bond forms contain clauses burdensome to the carrier and may require more stringent underwriting for a Surety to accept the risk. Surety professionals should understand these difficult clauses and how it may impact their ability to entertain certain risks.