3.2 Collateral & Build-Up Funds
Key Takeaways
- Miss. Code 83-39-25(3) lets an agent hold collateral or take a security interest only to insure premium payment or indemnify against forfeiture loss and apprehension costs.
- Collateral is security, not income; it must be returned when the bond is exonerated, less earned premium and legitimate documented expenses.
- The premium is earned and non-refundable, but collateral is always returnable to whoever pledged it.
- Build-up funds (BUF) are surety-contract reserves funded from premium, held by the general agent or insurer to cover the agent's future losses, not the defendant's money.
- Failing to return collateral, commingling it, or treating it as profit are prohibited practices that support discipline under 83-39-15.
Collateral: Security, Not Profit
Collateral is property a defendant or indemnitor pledges to back the bond. Miss. Code Section 83-39-25(3) authorizes it for two limited purposes: to insure payment of the premium, and to indemnify the agent against losses from a forfeiture or the costs of apprehending and surrendering the principal. Collateral is never extra compensation.
Holding and Returning Collateral
Because collateral is security rather than a fee, the agent's duties center on safekeeping and return:
- Receipt required. Give the person who pledges collateral a written, itemized receipt describing the property and its value.
- Hold, do not spend. The agent safeguards the collateral; cash collateral should not be commingled with operating funds.
- Return on exoneration. When the bond is exonerated, the collateral goes back to the person who pledged it, less earned premium and legitimate, documented expenses.
- No conversion. Keeping collateral after exoneration, or applying it to anything beyond premium and bona-fide loss, is a prohibited practice.
Premium vs. Collateral (a Classic Trap)
| Feature | Premium | Collateral |
|---|---|---|
| Nature | Earned fee | Pledged security |
| Refundable? | No (earned when posted) | Yes (returned on exoneration) |
| Statutory cap | 10% / 15% or $100 | No cap; tied to risk |
| Purpose | Pays for the guarantee | Secures premium and loss |
Build-Up Funds (BUF)
A build-up fund (BUF) is a reserve account, funded from a slice of each premium, that a general agent or surety insurer holds to cover an individual agent's future forfeiture losses. It is a surety-contract arrangement on the insurance side of the business, not the defendant's collateral. A BUF protects the insurer; collateral protects the agent and is returnable to the pledgor. Confusing the two, or returning a defendant's collateral from a BUF, is a recurring exam distractor.
Under Miss. Code 83-39-25(3), for what purpose may a Mississippi bail agent hold collateral?
A defendant's case is dismissed and the bond is exonerated. The indemnitor pledged a $3,000 watch as collateral, and the agent earned a $400 premium with $50 in documented expenses. What must the agent do?
How does a build-up fund (BUF) differ from collateral?