MISCELLANEOUS SURETY BONDS
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MISCELLANEOUS SURETY Bonds

 

MISCELLANEOUS SURETY BONDS

Miscellaneous Surety bonds are those that do not clearly fall within the scope of Public Official, Fiduciary, Court or License and Permit Bonds.

Some of these bonds are required by law and must be conditioned as provided byMISCELLANEOUS SURETY BOND statute, ordinance, or regulation. Others are required by law having conditions discretionary with approving authorities. Others may be bonds or undertakings between private parties and are used to facilitate business transactions with conditions prescribed by or acceptable to the obligee.

Included among the Miscellaneous Surety Bond classification are the following types of bonds which are requested to write with some frequency and which require special underwriting attention:

  • Airline Reporting Corporation Bonds for Travel Agencies (ARC)
  • Concessionaires Bonds
  • Financial Guarantees
  • Franchise Bonds/Pole Attachment
  • Game of Chance
  • Income Tax Bonds
  • Indemnity Bonds to Railroads
  • Lease Bonds
  • Lost Securities Bonds
  • Miscellaneous Indemnity Bonds
  • Premium Payment Bonds
  • Signature Guarantees to Transfer Agents
  • Union Wage and Welfare Bonds
  • Utility Bonds
  • Workers' Compensation Self Insurance Bonds
  • Customs Bonds

MISCELLANEOUS INDEMNITY AND/OR FINANCIAL GUARANTEES

MISCELLANEOUS INDEMNITY AND/OR FINANCIAL GUARANTEE SURETY BONDMost miscellaneous Indemnity and financial guarantee bonds are written to guarantee some type of contract or obligation between private parties. Some obligations are classified as miscellaneous indemnity bonds since the bond states that in the event the Principal does not carry out his/her obligation, the Principal and Surety are to pay the Obligee for the default. In other cases, the entire bond is to be forfeited as damages if the Principal does not carry out his/her obligation. These obligations are classified as financial guarantees because the Principal has no alternative but to pay a sum of money in the event of default. Collateral is the general underwriting safeguard.

During the late 70s and early 80s surety companies began writing long term, financial guarantees that were known as Limited Partnership Bonds, Credit Enhancement Bonds, and Structured Settlement bonds. These financial guarantees were so hazardous that State Insurance regulators became concerned large losses on these bonds could jeopardize the financial strength of the property casualty companies writing them. In 1989, the State of New York enacted the Appleton Law, which requires carriers licensed in the State of New York to apply NYS Credit Enhancement Regulations in all domestic jurisdictions. NYS Regulations prohibit sureties from writing this type of business, unless they formed mono-line companies, which would write only these types of long term, financial guarantees. Most bonds that fall in this category can be identified because they guarantee some type of note or mortgage or insurance contract.

INCOME TAX BONDS

The Income Tax bonds generally guarantee the payment of a disputed tax obligation orINCOME TAX SURETY BOND a tax payment that has been deferred because of the Principal's inability to pay the tax when due.

Generally, when an income tax case is appealed to higher courts, any bond required is treated as a Court bond. These bonds are financial guarantees of the most stringent type. Most of them guarantee payment on a specified date. At maturity, at the discretion of the tax officers, a further extension may or may not be granted. Lacking payment by the principal and lacking a further accommodation by the authorities, the bond becomes virtually a draft in favor of the USA. Other bonds in this group may mature upon the occurrence of a particular event, but the result is the same in that the tax is decreed due and payable after all remedial procedures have been carried out.

FRANCHISE/POLE ATTACHMENT BONDS

Telecommunication and Cable Television Companies normally require two types of surety bonds. The first type is a Franchise Bond runs to the municipality granting the cable franchise and guarantees the franchise agreement including the payment of franchise fees or taxes. The second type is a pole attachment bond runs to a utility company and guarantees the annual pole rental payments and the ultimate removal of the cable from the utility poles if necessary.

Both bonds are financial guarantees and cover contracts that normally run five years with renewal options of equal length. Though most bonds contain cancellation provisions, the bonds are essentially long-term obligations. Sureties can only successfully terminate future liability if there is a replacement Surety willing to replace the bonds. The long-term nature of these bonds, the highly leveraged condition of most cable companies and the threat of new technology that could render the cable concept as obsolete, require that these obligations be underwritten very carefully.

FARM LABOR BONDS

Guarantees payment of all sums due farm laborers only. Guarantees compliance with Labor code & payment of all damages to any person for failure to do so.

LEASE BONDS/CONCESSIONAIRE BONDS

Lease bonds generally guarantee the payment of rent and, in some instances, the fulfillment of other terms of a lease agreement. This class of business is the purest form of financial guarantee. Lease bonds generally guarantee the terms of a lease between private parties while concessionaire bonds generally guarantee the terms of aLEASE BONDS/CONCESSIONAIRE BONDS lease for space owned by a public body such as at airports, train stations, public buildings, etc. The most important phase of underwriting a Lease bond is a thorough examination of the lease itself as the bond guarantees compliance with the terms of the lease. Bond forms are not standard, therefore, it is important that a copy of the proposed bond form. Generally, most sureties are not receptive to issuing bonds covering long-term leases, so one of the underwriting requirements may be the term of the bond be limited to one or two years, and renew annually thereafter subject to financial and underwriting review.

As indicated above, this is a difficult bond and should only be considered for substantial applicants with unquestioned financial resources. In the absence of a strong financial position, most sureties ordinarily require collateral.

LOST SECURITIES BONDS

When an owner of negotiable instruments or securities; such as a certificate of deposit, certified or cashier's check, warehouse receipt, stock certificate, municipal or corporate bonds; loses the original instrument, their usual recourse is to obtain a duplicate instrument or security. LOST SECURITIES SURETY BONDPrior to issuing a duplicate, the issuer will require a bond to indemnify it against loss, costs, damages and expense, should the original instrument be presented for payment. Bonds are written in a fixed dollar amount when the instrument is not subject to appreciation. For securities, such as common stocks, where the security may appreciate in value, the bonds are written with an open penalty.

The person who seeks the duplicate is usually the owner of record of the original, and a duplicate will only be issued if the owner of record certifies in writing that the original has been lost, stolen or destroyed and that he has not endorsed it nor has made any assignment to his right there under.

Underwriting a lost securities bond requires development of the following facts:

  1. The integrity of the owner
  2. Negotiability of the instrument
  3. Circumstances surrounding the loss
  4. Financial responsibility of the owner

If the lost, stolen or destroyed security was in bearer form, was assigned, endorsed or a power of transfer executed, proceed with caution. If no assignment, endorsement or transfer was made, if the circumstance surrounding the loss seems reasonable, if the value of the securities is reasonable, and if the Principal is responsible and of good character, the risk is generally acceptable. Lost security bonds can also be written under a blanket program specifically designed for large banks that have Transfer Departments and large corporations who act as their own transfer agent. A transfer agent is the party responsible for issuing stock certificates to owners as shares of stock in a publicly held corporation are bought and sold. The blanket bond is executed with coverage attaching to it for each stock certificate that is lost by way of an Affidavit that contains an assumption of liability clause.

WORKER'S COMPENSATION SELF-INSURER'S BONDS

Large corporations who have elected to pay claims for worker's compensation out of their own funds rather than insure such claims with an insurance company need these bonds. The laws of different states vary with respect to the coverage provided, but they follow the same general pattern. The bonds may be annual or continuous with a cancellation clause, but the obligation that the surety guarantees is a long duration.

The bond forms vary by state. Some states have a "last Surety on" clause that has theWORKER'S COMPENSATION SELF-INSURER'S SURETY BOND new Surety pick up all past, present and future liability of the Principal while they were self insured. Other states have a form that has the Surety responsible for all claims that occurred during the time their bond was in force.

The Surety is liable for all compensation awards as a result of an accident or work related disability occurring during the term of the bond. Generally, payments under these awards extend for the entire life of the injured party if he or she is unable to return to work.

The hazard of this type of obligation is two-fold. First, the long-term nature of the obligation raises the possibility that the Principal may go out of business while the bond still affords coverage. Second, in some states the bond penalty compounds each year the bond is in force. Taking collateral to mitigate a Surety's liability is complicated by the fact that some states will also accept collateral and because of the long-term nature of the risk one never knows when the collateral may be safely returned.

ARC BOND (Airline Reporting Corporation or Travel Agents Bond)

The bond guarantees the Principal will, on a weekly basis, report and remit funds collected for the transportation sold to the Obligee.

CONCESSIONAIRES BOND

This bond guarantees the performance of services according to a specific agreement with the obligee and guarantees any payment of fees, etc. as stated in the agreement. This is often required by airports or other publicly controlled entities for operation of duty free shops, food services, rental car facilities, newsstands, etc.

GAME OF CHANCE BOND

These bonds are currently only required by Florida and New York.

They guarantee that the Principal will operate his/her contest according to regulations within these states and will ultimately award any prizes according to the contest rules.

Each bond only benefits residents of its respective state.

LEASE BOND

This type of bond guarantees performance of a portion of or an entire lease agreement. Depending on the wording of the bond, it may only guarantee payments listed in the lease due the lessor or it may involve everything in the lease from payment, remodeling the facility, to guaranteeing insurance coverages are available, etc. Examples of entities requiring these bonds would be retail operations leasing space in strip centers, air freight companies leasing space at airports, etc. Most obligations are long term in nature.

ADDITIONAL INFORMATION REQUIRED

Copy of lease and bond.

LOST INSTRUMENT BOND (Lost Securities Bond)

This bond indemnifies the issuer of the security or his/her agent against financial loss as the result of issuing a replacement document in the event of a lost security.

PREMIUM GUARANTEE BOND
(Cash Flow Bond, Retro Premium Guarantee Bond)

On certain types of insurance policies, the insurance company may accept a quarterly/monthly payment arrangement or the policy may be written with a deposit premium paid up front with an audit at the end of the obligation to determine any additional premiums due. Under either of these situations, the Insurance Company may require a bond if the potential amount due could be substantial.

UNION WAGE & WELFARE BOND (Collective Bargaining Bond)

UNION WAGE & WELFARE SURETY BONDThe bond guarantees employer contributions or payments to unions and their members. It may guarantee payment of the union wage scale as well as contributions for fringe benefits. This is considered a strict financial guarantee.

 

 

UTILITY PAYMENT BOND

This bond guarantees the Principal will remit payment for utility bills incurred to the utility company. This obligation is a strict financial guarantee.

SELF INSURER'S WORKERS COMPENSATION BOND
(Workers Compensation Bond
)

By law, businesses are to carry Workers Compensation insurance coverage for all employees who might be injured on the job or while conducting business for their employer. In some states, the employer can retain the first layer of this coverage and become self- insured. This bond is required to guarantee that the employer will administer and pay all eligible claims that fall within their self-insurer's retention.

CUSTOMS BONDS

Customs uses a uniform bond form to cover most Customs obligations. This form may be used to cover a single transaction or it may be written as a continuous bond covering all entries or transactions. In the latter case, liability is cumulative in that the Surety is liable for the face amount of the bond for each year the bond is in effect.

While the bond can cover 10 specific import related activities, the needs of most Principals will fall into one or more of the first four activities. It is important that the bond be completed using the correct activity code to insure the proper coverage for the Principal. Please note that while the preceding information is generally the practices and procedures of Customs, all is subject to the discretion of each District Director.

Also note that the traditional, general power of attorney cannot be used with customs bonds. Sureties must file special powers of attorney with the U.S. Customs.

{As of this writing, Customs is reviewing the guidelines for establishing the bond.}

Activity 1 - Importer or Broker

Generally, this activity is used by an importer of merchandise to guarantee to the government that the duty is paid, in the proper amount, and that the goods imported are in compliance with the laws of the United States.

Most companies who might need a Customs bond are more apt to require one covering activity (i.e. for importing.). An importing company must decide whether to use single transactions bonds or use a continuous bond. Most companies will use the facilities of a Customhouse broker to handle the paperwork required by U.S. Customs when merchandise is imported. While some large companies may use their own staff to do this work, most will employ a Customhouse broker. Depending on the value of imports and type of commodity, the cost of using single transaction bonds can exceed the cost of a continuous bond - which would cover all shipments for one year - after only one or two shipments. Unfortunately, importers are not always aware of this and end up spending money unnecessarily.

Bond Amount

Single Transaction - This bond is usually completed for either an amount equal to the value of the merchandise plus the duty and other taxes or, for certain merchandise as determined by U.S. Customs, an amount equal to three times the value of the merchandise.

Continuous - The bond amount is usually equal to 10% of the duty and other import taxes paid in the previous year, in multiples of $10,000 if the duties are less than $1,000,000 or multiples of $100,000 if the duties are over $1,000,000. Normally, the bond will not be permitted for less than $50,000. Further, care should be taken to insure that the bond is sufficient to cover the duty, not the value, on any single shipment of merchandise.

Activity 1A - Drawback Payment Refunds

Drawback is a procedure under which an exporter can obtain refunds on duties previously paid on imported good, which have been exported. An exporter may claim drawback under either of two procedures: exporter's summary or accelerated payment under which payments are received more quickly.

Bond Amount

Single Transaction - This bond is done for an amount equal to the accelerated drawback duty being claimed for the covered entry.

Continuous - This bond is completed for an amount equal to the total drawback duty to be claimed in one year.

Activity 2 - Custodian of Bonded Merchandise

  • This activity is used to cover operations which carry or hold merchandise not yet entered into the commerce of the United States, for export or entry at a later time or place; also known as "Bonded Merchandise." Operations such as bonded warehouses, cartmen, carriers, and container stations are covered under this activity. Also, importers carrying their own bonded merchandise would be required to obtain this coverage.
  • The bonds guarantees payment of liquidated damages which may result in the mishandling of the good in the warehouseman's care, or not having the proper documentation to show proper delivery.

Bond Amount

Single Transaction - N/A

Continuous - The amount of the bond is determined by Customs based on its application and is dependent on the size and type of operation. During the application approval process Customs will advise the principal of the correct bond amount.

Activity 3 - International Carrier

This activity is for operators of ships, airlines, and other conveyors of international merchandise. The bond is to ensure the operators properly manifest the goods they are carrying, pay for overtime services, remit passenger user fees and comply with other Customs regulations related to the clearance of the vessel.

Bond Amount

Single Transactions - This amount is determined by Customs at the time of clearance, but is generally not less than $25,000.

Continuous - This bond amount is determined by Customs, but is generally not less than $50,000

Activity 3A -Instruments of International Traffic

This activity is used to cover the movements and clearances of containers that move internationally. Without this provision each container moved into the United States would have to be entered and duty paid upon entry.

Bond Amount

Continuous - This bond is usually done for $20,000.

Activity 4 - Foreign Trade Zone Operator

This activity is used to cover operators of foreign trade zones. A foreign trade's zone is much like a bonded warehouse it that goods in the zone have yet to be entered in to the United States. The coverage is also similar to that under Activity 2 operations.

Bond Amount

Continuous - This bond amount is determined by Customs, but is generally not less than $50,000

FEDERAL MARITIME COMMISSION BOND

Those businesses operating as ocean transportation intermediaries (OTI) are required by Federal Regulation to post bonds with Federal Maritime Commission. The bonds, FMC Form 48, secure the obligations of OTI's operating as either Freight Forwarders and/or Non Vessel Operating Common Carriers (NVOCC).

A Freight Forwarder is engaged in the business of dispatching shipments on behalf of others, in order to facilitate shipment by a common carrier. Freight Forwarders commonly handle most of the freight arrangements on behalf of their shipping customers. Freight Forwarders generally charge fees for the services performed on FEDERAL MARITIME COMMISSION SURETY BONDbehalf of their customers.

An NVOCC is engaged in the business of freight consolidation and transportation. The NVOCC takes legal possession of shippers' cargo and consolidates the shipments, arranges for packing, transporting and loading of shipping containers directly with an ocean common carrier.

The Ocean Shipping Reform Act of 1998 requires all OTI's to provide proof of financial responsibility to secure their obligations to the Federal Maritime Commission as well as to third parties for their transportation related activities as an OTI. The most common instrument of financial responsibility is a surety bond.

Bond Amount

The bond is posted in the amount of $50,000.00 for Freight Forwarders, $75,000.00 domestic NVOCC and $150,000.00 for a foreign NVOCC. Both Freight Forwarders and domestic NVOCC can have additional branch offices added to their bond. Each additional branch or location will require the bond amount to be increased in $10,000.00 increments.

ATF Bonds

The Bureau of Alcohol, Tobacco, and Firearms is responsible for the collection of alcohol and tobacco excise taxes resulting from the importation, storage, or production of alcohol and tobacco products. It also regulates the qualification and operations of distilleries, wineries, and breweries, as well as importers and wholesalers in the industry and qualifies applicants for permits to manufacture or import tobacco products or to operate tobacco export warehouses.

ATF Surety Bonds

ATF bonds may be filed as new, superseding or strengthening. The ATF does not make any distinction between a new or superseding bond; therefore, the Principal may file either a new bond or a superseding bond if an old bond exists. Superseding bonds are generally used when the Principal changes Surety. Strengthening bonds are filed when the ATF requires a bond amount be raised to meet bond sufficiency. Strengthening bonds must be filed with the same Surety and show current dates of execution and effective date. The amount of the Strengthening bond is equal to the additional coverage required by the ATF. As with all ATF forms, new, superseding and strengthening bonds must be filed in duplicate original.

Changes, such as an address or change of principal's name are made via a Consent of Surety form and must also be filed with ATF in duplicate original.

As there are several different obligations with which the ATF is concerned, there are a multitude of bonds the ATF uses in order to meet these obligations. The most common bond forms are the ATF Form 5150.25, the Industrial Alcohol Bond and the ATF form 5154.3 Bond for Drawback and the ATF form 5110.56 Distilled Spirits Bond.

Industrial Alcohol Bond (Form 5150.25)

This bond is concerned with the production and distribution of specially denatured spirits (alcohol/rum). It identifies the location of the premises and ensures that the premises will be in conformity with federal laws and regulations. Once this bond is filed with ATF the permit, which allows Principals to operate in this capacity, is issued.

Bond Amount

ATF will prescribe the bond amount based on the application the Principal files their office, based on the ATF regulations. To determine bond sufficiency, the ATF examines the amount of alcohol or denatured spirits produced or stored during a period of generally 15 days. The bond amounts can range anywhere from $5,000.00 to $1,000,000.00 depending on the type of activity the Principal is engaged in. The bonds are generally all location specific, so when a new facility needs to engage in some activity requiring coverage the bonds currently on file must either be rewritten or an amended through the use of a Strengthening bond.

Distilled Spirits Bond (Form 5110.56)

This bond covers operations engaged in the production and moving of distilled spirits from one secure (bonded) facility to another and the general storage of those goods. It guarantees that the principal will be responsible for any tax or fee the ATF may assign to a particular type of distilled spirit if those goods are produced, removed and/or transported incorrectly. This bond may be used to cover various activities as listed below:

  1. Distilled Spirits Surety BondOperations This bond is used to cover specific operations that the ATF requires be bonded. Those operations are:
    1. One Plant Bond
      This specific bond covers Distillers, Warehouse Operations, and processors at a single location.
    2. Adjacent Wine Cellar Bond
      This bond is used when the facility classified as a "wine cellar" is combined with any combination of other facilities whose activities require a bond.
    3. Area Operations Bond
      This bond allows any entity that operates two or more plants in a particular ATF region and any bonded wine cellars, which are adjacent to those plants to file one bond to cover them, all, as opposed to an individual bond for each. This includes subsidiaries, which may be listed on the bond as additional principals. All the facilities covered by the bond must be specifically listed on the back of the bond or, as instructed by an addendum.
  2. Withdrawal Bond
    This bond allows an individual or company to withdraw a certain amount of specially denatured spirits from a bonded facility. It protects the tax that is due to the ATF by guaranteeing that the withdrawer only withdraws as much as permitted by their particular permit.
  3. Unit Bond
    This bond allows any entity which under normal circumstances would have to furnish separate bonds for both the operation of a one or more distilled spirits plant (and any adjacent bonded wine cellars) and withdrawal bonds for a particular ATF region, to file one bond to cover all these activities. This includes subsidiaries, which may be listed on the bond as co-principal. All the facilities covered by the bond must be specifically listed on the back of the bond or, as instructed by an addendum.
  4. Alcohol Producer Bond
    This bond guarantees compliance with the ATF's strict regulations regarding the production of specially denatured spirits and alcohol products. The bond guarantees a wide range of coverage's including notification of the ATF of commencement of production operations and removal or destruction of distilling materials.

Bond Amount

  1. Operations
    1. One Plant Bond
      Based on the combination of operations covered by this bond, the bond amount can range from $5,000 to $250,000.
    2. Adjacent Wine Cellar Bond
      The bond amounts will range from $6,000 to $300,000 and are prescribed by the ATF
    3. Area Operations Bond
      The penalty amount of the bond will range from $300,000 to $2,000,000
  2. Withdrawal Bond
    The bond amount will range from $2,000 to $15,000 and is prescribed by the ATF.
  3. Unit Bond
    The total liability amount of the bond will be equal to the amount of any individual bonds that may have been required.
  4. Alcohol Producer Bond
    These bond amounts range from $1,000 to $1,000,000 and are set by the ATF.

Bond For Drawback Under 26 U.S.C. 5131
Manufacturers of Non-Beverage Products (Form 5154.3)

This bond is concerned with the reclamation of excise tax by the Principal. When alcohol products are produced in the United States, a tax is assigned and collected by the ATF at the distilled spirits plant or place of production. When the Principal on the drawback bond purchases these products from the distilled spirits plant or place of production the plant collects an additional excise tax from the Principal. When the Principal uses the product under certain qualifying standards, they are entitled to reclaim a certain percentage of the excise tax paid to the plant from the ATF. The bond ensures that when a Principal does this on a monthly basis, that they are claiming the correct amount of drawback.

Bond Amount

This bond amount should be equal at least equal to the expected total drawback for the coming 12 month period.

Carnet Bonds

In the international trade community, the Carnet serves as an international Customs document, allowing expedited clearance of goods through Customs of participating countries. While the same Carnet may be used to clear multiple countries, only countries, which participate in the program, will accept the Carnet. The Carnet bond guarantees that the Principal will remain in compliance with various guidelines theseCarnet Surety Bonds countries have established in order to facilitate this process. In the United States, The U.S. Council administers Carnets for International Business or USCIB, while any approved Surety company may provide the bonds.

Carnet Bonds guarantee the obligations of an individual or businesses that are issued ATA Carnets. The ATA Carnet allows individuals or businesses to temporarily export goods, merchandise, equipment, etc. to foreign countries under a single document. The Carnet simplifies Customs procedures in both the destination country as well as facilitating the return of the merchandise to the United States. The United States Council for International Business administers the Carnet system. Along with the Carnet application, the USCIB will also require security in the form of a certified check or a Carnet Bond from an approved surety. The Carnet bond secures the obligation of the carnet holder to properly account for all items traveling under the Carnet. The obligation under a carnet is satisfied once the exported items traveling under the Carnet have properly cleared U.S. Customs upon the carnet holder's return to the U.S. The Carnet has the capability of covering most products and goods. However there are a few notable exceptions. The Carnet will not cover consumable goods (food and agriculture products), disposable and hazardous items, or postal traffic.

Bond Amount

The participating country, to which the Principal will travel, sets the bond amount. While most participating countries set the bond amount at 40% of the value of goods, some require a bond in the amount of 100% of the goods. Please visit the U.S. Council for International Business' website with regards to which countries currently participate in the program and what bond amounts they require.

 
 

 

*Some information provided by the National Association of Surety Bond Producers

 
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