16.1 Surety and Fidelity Bonds

Nevada's Property and Casualty combo exam folds surety and fidelity bonds into the Casualty portion under "Types of Policies, Bonds, and Related Terms" — the single highest-weighted casualty domain on the blueprint. Bonds look like insurance policies on the surface (a declarations page, a premium, a limit called the "penalty"), but the legal relationship underneath is fundamentally different. Getting the three-party structure and the surety's right of reimbursement correct is worth more exam points than any other topic in this chapter.

Insurance vs. Suretyship: Two Different Legal Animals

Insurance is a two-party risk-transfer contract: the insurer accepts a premium and expects to pay some losses across its book of business. The insured has no obligation to reimburse the insurer for a covered claim. Suretyship is a three-party credit and guarantee arrangement: the surety guarantees to a third party (the obligee) that the principal will perform an obligation, and if the surety pays a claim, the principal is contractually required to reimburse the surety in full.

Exam trap: a stem describing "a company that guarantees a contractor will finish a job, and if it doesn't, the guarantor can sue the contractor to get its money back" is suretyship, not insurance — even though the same insurance company underwrites both lines.

The Three Parties, Defined

• Principal (obligor) — the party whose performance or honesty is being guaranteed (the contractor, the notary, the executor, the license holder).
• Obligee — the party protected by the bond; the one who can make a claim if the principal fails to perform (the project owner, the state agency, the court, the employer for fidelity bonds).
• Surety — the insurance company that issues the bond and pays the obligee if the principal defaults, then seeks reimbursement from the principal.

Every bond application requires the principal to sign a general indemnity agreement, contractually promising to reimburse the surety (plus legal fees) for any bond loss. This single document is what separates suretyship from insurance economically — it converts the surety's payment into a loan the principal must repay, not a risk the surety absorbs.

Underwriting a Bond: The Three Cs

Because the surety expects zero losses, bond underwriting looks more like commercial lending than insurance rating:

1. Character — the principal's reputation, integrity, and track record of completed obligations.
2. Capacity — the principal's experience, staffing, equipment, and management ability to complete the specific obligation (for contractors, whether the firm can actually build the project on time).
3. Capital — the principal's financial strength, working capital, and access to credit to absorb cost overruns without defaulting.

Large or higher-risk bonds may also require collateral (cash, letters of credit) held by the surety in addition to the indemnity agreement.

Contract Surety Bonds

Contract bonds guarantee performance on construction and supply contracts:

Worked example — bid bond forfeiture. A contractor bids $2,000,000 on a Clark County school project backed by a 10% bid bond ($200,000 penalty). The contractor wins but refuses to sign the contract. The county re-awards to the next bidder at $2,140,000. The bid bond surety owes the difference, $140,000, capped at the $200,000 bond penalty — and then pursues the defaulting contractor under the indemnity agreement for that $140,000.

Federal projects require bonds under the Miller Act; Nevada public works above statutory thresholds require performance and payment bonds under Nevada's Little Miller Act (NRS 339) — a frequent Nevada-specific tie-in to this national topic.

Court (Judicial) Bonds

Court bonds fall into two families:

• Fiduciary bonds — protect beneficiaries when a court appoints someone to manage others' property or affairs: executors/administrators of estates, guardians of minors or incapacitated persons, trustees, and conservators. The bond guarantees faithful, honest administration of the assets.
• Litigation bonds — required during a lawsuit: an appeal bond guarantees payment of the judgment (plus costs) if the appeal fails; an injunction bond guarantees payment of damages if a wrongfully obtained injunction harmed the defendant; an attachment/replevin bond guarantees payment if property was wrongfully seized before judgment.

Exam distinction: fiduciary bonds protect beneficiaries of an appointment; litigation bonds protect a party from harm caused by another party's use of the court process.

License and Permit Bonds

State and local governments require many license holders to post a bond as a condition of licensure, protecting the public against the license holder's violation of law:

• Contractor license bonds — required by the Nevada State Contractors Board for most license categories.
• Notary bonds, auto dealer bonds, motor vehicle title/escrow bonds, and various permit bonds (excavation, right-of-way) required by municipalities.
• Public official bonds — guarantee a treasurer, clerk, or sheriff will faithfully handle public funds and duties.

Fidelity Bonds: Guarding Against Your Own Employees

Fidelity bonds (now often sold as employee dishonesty coverage within a crime policy) protect an employer against loss caused by the dishonest acts of its own employees — theft, embezzlement, forgery, and similar crimes. Structurally, fidelity is still three-party (employer is obligee, employee is principal, insurer is surety), but it behaves much more like insurance in practice: the surety rarely expects to actually collect from a dishonest, often insolvent or fled employee, even though the right of subrogation technically exists.

Special fidelity forms include:

• ERISA bonds — federal law requires anyone who handles funds of an employee benefit plan to be bonded at a minimum percentage of plan assets, protecting plan participants against fiduciary theft.
• Financial institution bonds — broad-form crime coverage tailored to banks and credit unions, covering employee dishonesty plus additional crime perils (forgery, computer fraud, funds transfer fraud).

Nevada scenario: a Reno dental practice's office manager embezzles $85,000 over three years by altering deposit records. A $100,000 employee dishonesty bond reimburses the practice up to its limit; the insurer can pursue the former employee for reimbursement, but in practice recovers little — illustrating why fidelity bonds are priced and reserved more like first-party insurance than true suretyship.

Bond Premiums and Cancellation

Unlike insurance premiums, bond premiums are frequently treated as fully earned once the bond is issued, because the surety has extended a guarantee the obligee relied upon — the surety cannot simply "un-guarantee" a contract already awarded. Many statutory and court bonds are continuous until formally released or replaced, and a surety wishing to exit must give the obligee advance notice and often cannot terminate exposure for work already performed. Producers should never treat a bond like a cancelable liability policy without checking the specific bond form and statute.

Memory anchors: three parties (principal-obligee-surety) · surety expects zero loss and can seek reimbursement · indemnity agreement makes it a loan, not risk transfer · bid/performance/payment/maintenance = contract bonds · fiduciary vs. litigation = court bonds · fidelity = protects employer from its own dishonest employees.