January 21st, 2021

Surety Bond Glossary for Insurance Agents


Customers who need surety bonds often use terminology unfamiliar to most insurance agents. Agents with a basic understanding of common language used in the surety industry (“surety-speak”) can more effectively service their customers. You won’t hear much of this language from BondExchange underwriters, but regardless, we think this glossary will be helpful. Below are the “plain English” definitions of surety-speak we hear every day.

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A fiduciary handling the affairs of an individual who passed away without leaving a will

Adverse Selection

For surety bonds, this usually means that the bond is only required if the bond principal does not meet some other type of qualification with a regulator. For example, the bond might only be required if a business fails to provide financial statements showing sufficient cash.

Aggregate Liability

A clause in the bond form that limits the Surety’s liability to the bond penalty regardless of the number of claims made against the bond

Alcoholic Beverage Tax Bond

Required for business entities who sell, manufacture, or store alcoholic beverages or non-beverage products

AM Best Rating

A rating conducted by the AM Best Company outlining an insurance company’s financial stability and capacity to make payments on claims. Some surety bond Obligees require the surety company to carry an AM Best rating.

Attorney in Fact

The individual authorized by a surety company to sign and issue surety bonds on their behalf.

Audited Financials

An independent review conducted by a Certified Public Accountant of an individual or entity’s financial statements. Audited Financial statements are prepared in accordance with generally accepted accounting principles (GAAP).

Auto Dealer Bond

Required for auto dealers as a prerequisite for obtaining a license. The bond ensures auto dealers engage in ethical business practices and is a type of License and Permit Bond


Balance Sheet

Outlines a company’s assets, liabilities, and shareholders equity over a given period of time. Is included in a financial statement. Assets – Liabilities and Equity must equal zero, hence the term “balance”.

Bank Depository Bond

Purchased by banks to ensure deposited funds are readily available for withdrawal


A legal proceeding where an individual or entity declares that they are unable to pay some or all of their debts:

  • Chapter 7: Liquidation
  • Chapter 11: Reorganization
  • Chapter 12: Family Farmer
  • Chapter 13: Handling of individual’s debts via payment plans to creditors

Bankruptcy Trustee Bond

Ensures that appointed bankruptcy trustees will follow all court rulings when carrying out their obligations

Bid Bond

Provides financial compensation to project owners that contractors bidding on a project will sign the contract and meet all requirements of the bid specifications, including the ability to provide a performance and/or payment bond, if the contractor is the winning bidder.

Blanket Bond

Protects the obligee from financial harm resulting in dishonest actions committed by the principal. These bonds are commonly purchased by businesses to protect themselves from employee dishonesty

Bond Form

A document signed by both the surety company and bond principal which lays out the conditions of the surety bond and holds both the principal and surety company legally liable for complying with the terms of the bond

Bond Limit

The maximum amount a surety company must pay the obligee in the event of a single bond claim. Bond limits are most often set by state legislatures

Business Financial Statement

Records outlining the financial standing of a business. Most underwriters will focus their review on the Income Statement (aka Profit and Loss) and Balance Sheet.


Cancellation Clause

A clause contained within a bond permitting a surety company to cancel a bond if they serve the principal and obligee proper notice

Cancellation Period

The required period of time that elapses between when the surety requests the bond to be cancelled and when the surety company is relieved of future liability.


The aggregate amount of risk a surety company is authorized to write based on insurance laws. For example, a surety company with $1 billion of capacity, can write up to $1 billion of total aggregate bond limits.

Cash Flow Statement

States the amount of cash generated by operations and investment activity. Is included in a financial statement.


The moral qualities distinctive to a principal. Surety companies may evaluate a principal’s moral character when determining bond eligibility by reviewing publicly available records or asking questions on an application.


A request from a claimant for payment from the surety company. When a claim is made against a bond, surety companies will follow a set standard of procedures as outlined here.


Funds, items, or property a principal agrees to forfeit in the event they do not repay the surety company for losses resulting from claims made against a bond. In surety, this usually comes in the form of a cashier’s check or irrevocable letter of credit.


The money paid to an insurance agent or broker for placing a surety bond

Commercial Crime Bond

Ensures businesses will receive financial compensation for losses resulting from criminal actions such as theft, forgery, and fraud

Commercial Bonds

Bonds required for individuals and business entities that are not related to the completion or performance of a construction project

Compiled Financial Statement

A financial statement that is “compiled” by a CPA. A compilation does not guarantee the accuracy of the financial statements, and is the lowest on the totem pole of quality and accuracy, preceding reviewed and audited financial statements

Consent of Surety

Applies to contract bonds and essentially means the surety company must consent before the final payment or “retainage” is made to contractors on a construction project


Fiduciary who administers the estate of a ward. Unlike guardians, conservators are only responsible for financial decisions rather than the health and well-being of the ward.

Continuous Bond

Most surety bonds are continuous, meaning that the bond does not have a set expiration date. The surety company must file a cancellation notice to stop their liability.

Contract Bond

Bonds that contractors purchase when bidding on or entering into a contract to perform work for a project owner. Examples include bid, performance, and payment bonds.

Contractor License Bond

Required for contractors as a prerequisite to obtaining a contractor license. The bond ensures the contractor will engage in ethical business practices.


A legal entity type organized to separate taxation and liability from its owners.

Co Surety

Occurs when multiple surety companies combine to write a bond that no individual company is willing to write on their own. The surety companies share in the liability of the bond if a claim occurs.

Court Bond

Bonds where the obligee is a court of law. Probate bonds are the most common type of court bond.

Certified Public Accountant (CPA)

CPA’s audit, review, or compile financial statements a principal submits to a surety company.

Credit Score

A numerical value assigned by a credit bureau (Experian, Equifax, or Transunion) indicating the likeliness an individual or entity will pay their bills on time. Credit scores are calculated by examining numerous factors such as the principal’s level of date and their history of making debt payments on time. Principals with higher credit scores will generally qualify for lower premium rates.

Cumulative Liability

The sum of all bond limits held by a single principal with multiple bonds.

Customs Bond

Bonds required by the U.S. Customs and Border Protection to ensure duties are paid and reported for importing and exporting activity.



The amount of money awarded to an aggrieved party by a court of law

Demand Clause

A provision in a contract that allows the obligee to demand payment from the surety company within a specified period of time. Surety companies have no ability to deny claims from an obligee if a demand clause exists


The act of removing the obligation to perform specific duties. For example, fiduciaries will need to be discharged of their duties for a probate or court bond to be cancelled

Discovery Period

The time after the expiration of a surety bond when the obligee or a 3rd party can file a claim for losses that occurred while the bond was active. Also known as a liability tail.


Earned Premium

Insurance companies “earn” premium over the term of the surety bond policy, usually an annual period. Earned premium is the portion of premium that has been earned at a particular time. For an annual premium that is 6 months into the term, earned premium will be 50% of the total premium.

Effective Date

The date a surety bond and the surety company’s liability goes into effect. The term “ERISA bond” comes from the law governing retirement plans known as the Employee Retirement Income Security Act of 1974 (ERISA).


Used to protect retirement plan participants, ERISA bonds are needed for all qualified retirement plans (i.e. 401ks, defined benefit plans, pension plans, etc.)

Errors and Omissions Insurance

Provides financial protection to professionals in the event they are sued as a result of an error or omission. Some surety companies offer this product; however, it is not technically a surety bond.


A fiduciary who has been designated as the executor in the will of an individual who has passed away

Expiration Date

The date on which a surety bond expires. Many surety bonds do not contain an expiration date and require cancellation from the surety company to relieve liability.


Fair Credit Reporting Act (FCRA)

A federal law ensuring consumer credit reporting agencies have accurate, fair, and private consumer information

Fidelity Bond

Commonly referred to as Employee Dishonesty, Business Services or simply Dishonesty bonds, provide protection to customers from theft when a business service provider has access to their personal or business property.


An individual or entity legally required to act in the best interest of another person or entity. Principals seeking to obtain a probate bond are often court appointed fiduciaries.

Financial Guarantee Bond

Guarantees that a business will make payments for bills or other obligations. Two of the most common are (1) utility deposit bonds for utility companies to guarantee on-time payment of utility bills and (2) union wage and welfare bonds to guarantee that contractors will pay union wages and benefits on union jobs.

Financial Guaranty Bond

Bonds guaranteeing principal and interest payments on a loan. These are specialty products not typically available in the United States.


The act of breaking up premium payments into smaller amounts in exchange for interest or fees. BondExchange offers no-interest no-fee installment payments on most bonds.

First Party Coverage

Referring to Fidelity bonds, this coverage  provides payment to the insured for losses experienced directly by the insured.

Forfeiture Provision

A provision in the bond allowing the obligee to claim the bond for the full bond amount regardless of the size of the actual loss.

Freight Broker/BMC-84 Bond

Is a prerequisite to obtaining a broker or freight forwarder license with the Federal Motor Carrier Safety Administration (FMCSA). Ensures freight brokers and forwarders will comply with licensing regulations and pay motor carriers and shippers on time and in full.



Fiduciary who administers the estate of a ward – a minor OR an individual deemed legally incompetent. The fiduciary may also make health related decisions for the ward.


Health Club Bond

Ensures that health club customers will receive refunds for services paid for but not received in the event a health club were to shut down. Serves as a prerequisite to obtaining a health club license.


Income Statement

Also known as a Profit and Loss Statement or P&L, an Income Statement is a financial document stating the profitability of a business over a certain period of time. Income statements are included in financial statements.


A person who a court of law has deemed incapable of maintaining their own health or well-being.

Indemnity Agreement

Holds principals legally responsible to repay surety companies for all claims made against a bond, legal fees, and claims handling expenses. Most surety companies require an indemnity agreement signed on behalf of the business and all owners as individuals. Spouses may also be required to sign the indemnity agreement

Indefinite Term

A surety bond that has no expiration date and must be manually cancelled


Related to court bonds, requires a defendant to refrain from performing some act that is detrimental to the plaintiff’s interest and is linked to the cause for a lawsuit.

Injunction Bond

Ensures that the plaintiff will pay all costs and fees suffered by the defendant in the event an a court deems the injunction should not have been issued

Insurance Broker Bond

Usually required by state insurance departments and protects a consumer from financial harm resulting from illegal acts committed by the insurance broker.


The person or entity covered by an insurance policy.


Jointly and Severally Liable

When two or more individuals or entities share the same liability. Most commonly used to indicate that a business owner is liable not only as the owner of the business, but also personally.


A legally binding decision made by a court of law.


KDL Distributor Bond

A bond required for Florida Liquor Distributors


Lease Agreement

A contract outlining the terms for which a lessee (tenant) rents property from a lessor (landlord)

License and Permit Bonds

Bonds that serve as a prerequisite for obtaining a state issued license or permit. For example, auto dealer bonds are a class of license and permit bonds.


A type of security interest granted to a debtor allowing them to claim ownership of an item or piece of property in the event a debt is not paid or an obligation is not met

Letter of Credit

A letter signed by a financial institution guaranteeing funds available to the beneficiary for a set period of time. Surety bonds act in a similar fashion to letters of credit. Principals will often have the option of obtaining either a surety bond or letter of credit to meet a government financial security requirement.

Limited Liability Company

A type of business structure allowing owners to utilize the tax structures of a sole proprietorship or partnership while not being held personally liable for the company’s debts


The availability of liquid assets (cash) owned by an individual or entity

Lost Securities Bond

Required by individuals seeking to replace or cash out on a lost cashier’s check or physical stock or bond certificates. The bond protects the financial institution from financial harm in the event the security is later found and sold.

Lost Title Bond

Bond required by most state DMVs when a vehicle title has been lost or damaged. Ensures financial compensation in the event the principal does not have legitimate ownership of the vehicle


Maintenance Bond

Also referred to as “warranty bonds”, these bonds ensure that the obligee will receive compensation in the event that poor workmanship leads to issues with a completed construction project

Minimum Premium

The minimum amount of premium a surety company will accept when issuing a bond

Miscellaneous Bond

Bonds that do not fit into any major bond category and serve a unique purpose

Money Transmitter Bond

Required for individuals and business entities who collect funds and transmit them to a third party. These bonds primarily ensure the full payment of funds to users of a money transmitter’s service.

Mortgage Broker Bond

Serves as a prerequisite for obtaining a mortgage broker license. Protects the obligee and sometimes the public from financial harm if the mortgage broker engages in unethical business practices


Nationwide Multistate Licensing System (NMLS)

Acts as a licensing portal for non-depository financial services licensing, primarily mortgage related business. Participating state agencies utilize the NMLS as the official licensing system that individuals and businesses must use to obtain a financial services license offered by the agency.

Notary Bond

Required for individuals seeking to obtain a notary commission



The entity requiring the principal to purchase the bond. Usually a government agency


A law enacted and enforced by a local municipal authority



A business entity jointly owned and operated by two or more individuals who are personally liable for the company’s debts

Payment Bond

Work in conjunction with performance bonds and ensure that laborers, suppliers and vendors will be paid by the contractor, preventing liens on the project that can affect the project owner and the success of the project.

Penal Sum

Same as the bond limit, is the maximum amount of money that the surety company is liable to pay the obligee in the event of a single bond claim.

Performance Bond

Provides assurance to the project owner if a contractor fails to complete the work specified in the contract and within the allotted time frame.

Personal Financial Statement

Lists the assets, liabilities and net worth of an individual

Power of Attorney

The right to act on behalf of another individual or entity in legal or financial matters. Also refers to the document that confirms the right of the attorney-in-fact to sign the surety bond.


The money principals pay to the surety company in exchange for the surety bond.

Premium Rate

The amount of money principals pay for their bond, can be calculated on a 1, 2, or three year basis


Occurs when a surety company has done an initial assessment of a principal and determines they are likely to qualify for a certain premium rate


The individual or business entity purchasing the bond

Private School Bond

Sometimes called proprietary or postsecondary school bonds, private school bonds compensation to students when schools shutter and do not provide refunds for prepaid tuition. These bonds are usually only required for institutions who offer for-profit postsecondary (aka after high school) education and collect prepaid tuition. Some common examples include driving schools, beauty/cosmetic schools, and other career or technical schools.

Pro Rated Premium

A proportionate amount of premium due for a shorter than normal period of time. For example, some bonds are required to expire on a specific date. If the bond is issued for a period shorter than one year, the bond premium would be “pro-rated” to a lesser amount to account for the shorter timeframe.

Public Official Bond

Ensures public officials will faithfully perform their duties in accordance with the law. Most often required for officials that handle public funds, like treasurers.



The payment terms offered to a bond principal for the purchase of a surety bond.



The formula used to calculate a bond’s premium

Rate Filing

The surety companies document filed with state insurance regulators prescribing rates and underwriting rules for insurance products.

Reclamation Bond

Ensures companies engaged in mining or other environmentally hazardous activities will leave the surrounding environment safe and habitable


Insurance purchased by the primary insurance company to share a portion of the premium and risk with another insurance company.

Release of Lien Bond

Grants property owners the ability to sell a property that has a mechanic’s lien . The bond ensures the lienholder will receive financial compensation should the property owner fail to pay funds owed to the mechanic.


A legal remedy allowing an individual or entity to reclaim property that was wrongfully seized and to receive compensation for any and all resulting losses

Reviewed Financials

Refers to a CPA examining a principal’s financial statements for inaccuracies. In terms of reliability of financials, CPA reviewed financials are a step above in-house financials prepared by the business owner or their employees.


Also known as an “endorsement”. Riders are documents that alter the conditions of surety bonds that are already in effect.



The Small Business Administration (SBA).  The SBA has a surety bond program that helps small businesses obtain bid, payment and performance bonds by providing surety companies with a guarantee for a portion of the risk on the bond.

Sole Proprietorship

A business owned and operated by a single individual who is personally liable for the company’s debts

Stacking Liability

An adverse bond form provision that allows claimants to file claims up to the full bond limit for each term of the bond. Normally, the surety company would only be liable for limit of the bond for as long as the bond is in effect.

Subdivision Bond

Protects a municipality (usually a city or county government) from financial harm if a developer fails to complete public infrastructure related to a subdivision project. Developers must purchase a subdivision bond if they intend to sell lots within the subdivision before the public infrastructure items have been completed.

Supersedeas Bond

Required for defendants seeking to appeal a court’s ruling. The bond ensures the plaintiff will receive compensation in the event the defendant loses the appeal and is unable to pay out the judgment. Also referred to an an “Appeal Bond”


The insurance company financially responsible for any claims made against a surety bond

Surety Bond

A three party contract between the principal, surety company, and obligee. Surety bonds ensure the surety will pay the obligee, up to the full amount of the bond, if the principal fails to comply with the provisions set forth in the bond.



The period of time in which a bond is active

The Miller Act

A federal law requiring contractors of federal public works projects to purchase surety bonds. Most states have also adopted “little Miller Acts” that require bonds for state contracts.

Third Party Liability

Allows individuals or entities other than the obligee to make claims against the bond. For example, the obligee of an auto dealer bond might be the DMV, but most auto dealer bonds allow customers of the auto dealers to make claims against them.


An individual or business entity responsible for overseeing the operations of a company, institution, benefits plan etc

Treasury Listing

The Treasury Department’s list of surety companies eligible to write bonds for the federal government



The process of determining the principal’s bond eligibility and premium rate. Common underwriting factors include the principal’s credit score and years of business experience

Utility Deposit Bond

Ensures consumers will pay utility bills on time and in full. This bond is not required by government agencies, but rather by private utility companies who oftentimes refuse to provide services unless the consumer purchases the bond


Vehicle Title Bond

Another name for a lost title bond, allows an individual to obtain a certificate of title if the original title has been lost or damaged.


Wage and Welfare Bond

Protect union workers and benefit plans ensuring that contractors with union contracts pay their union employee wages and benefits.


A minor or incompetent person for whom a court of law has assigned a person to manage their health and well-being, including financial affairs.

Working Capital

A calculation from a businesses Balance Sheet of the current assets (cash and cash equivalents) minus the current liabilities (amounts due within the next year).



A machine used by other bond brokers


Yacht and Ship Broker/Salesperson Bond

A bond required in California and Florida for brokers of yachts and ships.


Zoning Ordinance

Also referred to as a Subdivision Bond, the bond ensures that developers will complete public infrastructure projects as required in a zoning permit.