Bonds Terminology

The definitions appearing in this Glossary are provided solely for general informational purposes. They are not intended to be complete descriptions of all terms, conditions and exclusions applicable to the products and services defined. Also, in the case of any inconsistency between the definitions in this Glossary and the definitions appearing in the actual insurance policy, the definitions contained in the actual policy shall govern.

Additional Insured An individual or organization covered by an insurance policy other than the named insured in the policy declarations. In an automobile policy, anyone who drives the car with the owner’s consent is an additional insured; although, in most cases, the additional insured must be named in the policy.

Bond There is more than one type of bond. Insurance bonds are normally three-party contracts in which one party agrees to guarantee the act, performance, or behavior of a second party, to a third party. Two common types of bonds are fidelity and surety.

Fidelity Bond An insurance policy that reimburses an employer for employee theft or embezzlement

Surety Bond A written agreement wherein one party, called the surety, obligates itself to a second party, called the obligee or beneficiary, to answer for the default of a third party, called the principal.

Blanket Position Bond A fidelity bond insures an employer against loss from dishonest acts by employees. As the name implies, blanket coverage is granted for all employees in the regular service of the employer during the term of the bond. The bond is issued for a fixed sum and each employee is covered up to the full amount of the bond. The maximum amount payable for any single act of embezzlement involving more than one employee would thus be the amount of the bond multiplied by the number of employees involved

Bid Bond A bond intended to guarantee that the bidder on a construction, supply or service contract will enter into the contract if successful as a bidder. Should the bidder fail to enter the contract, the surety on the bid bond may be called upon to pay the difference between the amount of the principal’s bid and the bid of the next lowest qualified bidder.

Collateral With respect to a surety bond, collateral is anything of value that is pledged with the surety to protect that surety from a default loss by the principal.

Contract Bond In general terms, a surety bond guaranteeing the performance of a contract, usually associated with construction work, but possible for almost any kind of contract. Sometimes called a performance bond.

Indemnity Bond A bond to pay or reimburse an obligee should the principal fail to perform as agreed upon or fail to fulfill the terms of the contract or commitment as named in the bond.

License or Permit Bond A surety bond often required by municipalities and other public authorities to indemnify them against loss from breach of any regulation or ordinance under which the license or permit is issued.

Named Schedule Bond  A fidelity bond providing coverage for persons listed or scheduled on the bond.

Obligee The party in whose favor a bond runs, such as the party protected from loss under the bond.

Obligor One bound by the obligation covered by a bond. Also called the principal.

Performance Bond In general terms, a surety bond guaranteeing the performance of a contract, usually associated with construction work, but possible for almost any kind of contract.

Payment Bond A bond given by a principal, usually a contractor, to guarantee payment for labor or materials used in the work under a contract.

Principal A person or organization whose obligations are guaranteed by a bond.

Subcontract Bond A bond often required by the general contractor of a subcontractor, which guarantees to the general that the subcontractor will fully perform the subcontract in accordance with the terms. It also specifies that the subcontractor will pay for certain labor and material incurred during the process of the subcontracted work.