5.5 Surety Bonds, Fidelity Bonds & Professional Liability (E&O)

5.5 Surety Bonds, Fidelity Bonds & Professional Liability (E&O)

Quick Reference: A surety bond is a three-party guarantee. The principal promises to perform, the obligee is protected, and the surety stands behind the principal. When the surety pays, it has a right of indemnity to recover from the principal — a surety expects to be reimbursed, while an insurer expects to absorb the loss. A fidelity bond protects an employer against employee dishonesty. Professional liability / errors and omissions covers negligent acts, errors, and omissions in rendering professional services, and is written on a claims-made basis with defense inside the limit.

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1. Suretyship Is Not Insurance

The indemnity agreement is the whole point. Before a surety writes a contract bond, the principal and usually its owners personally sign a general indemnity agreement pledging to reimburse the surety for every dollar it pays plus expenses. The surety is extending credit, not transferring risk.

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2. The Bond Families

Contract Bonds (Construction)

The family a property adjuster meets most often, because they surface whenever a contractor fails mid-job on a repair a carrier is funding.

License and Permit Bonds

Required by a government body as a condition of issuing a license or permit. They guarantee that the licensee will comply with the law and the ordinance and, in many forms, will pay damages to members of the public injured by a violation. Texas requires them of motor vehicle dealers, contractors in some municipalities, notaries, and many other regulated occupations.

Public Official Bonds

Guarantee that an elected or appointed official will faithfully and honestly perform the duties of the office. In Texas, county treasurers, tax assessor-collectors, sheriffs, and constables are bonded.

Judicial and Fiduciary Bonds

• Judicial (court) bonds arise from litigation: appeal (supersedeas), attachment, replevin, injunction, and release of lien bonds. They protect the opposing party against loss caused by the court's provisional relief.
• Fiduciary bonds guarantee the faithful performance of a person appointed to handle another's property: administrator, executor, guardian, trustee, receiver.

Miscellaneous Bonds

Lost instrument bonds, lost title bonds, hazardous waste closure bonds, self-insurer's workers' compensation bonds, and the utility and warehouse bonds that follow specific statutes.

Texas Adjuster Hook — Bonds in Your Own Licensing File. Financial responsibility requirements reach adjusters themselves. A Texas resident adjuster agency (firm) must supply proof of financial responsibility in the form of a bond or an errors and omissions policy, and a public insurance adjuster must demonstrate financial responsibility under TIC § 4102.105. Bonds are not just something you adjust around; they are something your own license file contains.

3. Fidelity Bonds and the Commercial Crime Form

A fidelity bond protects an employer against loss of money, securities, or other property caused by the dishonest acts of its employees. Historically written as a bond, the coverage now lives in the Commercial Crime Coverage Form as Insuring Agreement 1 — Employee Theft.

Forms and structures:

• Individual bond — one named employee.
• Name schedule — a list of named employees, each with a stated amount.
• Position schedule — coverage attaches to a position (three cashiers, one bookkeeper) rather than to a person, so turnover does not create a gap.
• Blanket bond — all employees, one limit. Commercial blanket applies the limit per loss; blanket position applies the limit per employee involved in the loss, which can pay far more when several employees colluded.

Mechanics an adjuster must know:

• Discovery period. Most modern crime forms are discovery forms: the loss must be discovered during the policy period or within a stated extended discovery period (commonly 60 days, or one year for employee benefit plan claims), even if the theft happened earlier.
• Termination as to an employee. Coverage ends immediately for any employee once the insured (or an official other than a colluding one) learns of a theft or dishonest act committed by that employee, whether in the insured's employment or before it.
• ERISA fidelity requirement. Persons handling funds of an employee benefit plan must be bonded for at least 10 percent of the funds handled, subject to a $1,000 minimum and a $500,000 maximum (raised to $1,000,000 for plans holding employer securities).
• Excluded from both Texas statutes. TIC § 542.053(a)(4) excludes fidelity, surety, or guaranty bonds from the Prompt Payment of Claims Act, and TIC § 462.007(b)(3) excludes them from guaranty association protection. A bond claim runs on none of the Chapter 542 clocks and has no state backstop if the surety fails.

Related crime insuring agreements a Texas adjuster will see on the same form: Forgery or Alteration; Inside the Premises — Theft of Money and Securities; Inside the Premises — Robbery or Safe Burglary of Other Property; Outside the Premises; Computer Fraud; Funds Transfer Fraud; and Money Orders and Counterfeit Money.

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4. Professional Liability and Errors & Omissions

The CGL covers bodily injury and property damage. It does not cover economic loss caused by a professional's negligent advice or service, and most CGLs carry an outright professional services exclusion. That gap is filled by professional liability, marketed under several names:

The Five Features That Decide E&O Claims

1. Claims-made trigger. Coverage responds to a claim first made against the insured and reported during the policy period, not to when the error occurred. Chapter 7 of this guide develops the occurrence-versus-claims-made distinction in the CGL context, and every element there — retroactive date, prior acts, extended reporting periods — applies here with even more force, because professional errors surface years later.
2. Retroactive date. Acts committed before the retroactive date are never covered, no matter when the claim is made. A professional who lets a policy lapse and rebuys with a new retroactive date has erased years of prior-acts protection.
3. Defense inside the limit (“wasting” or “burning” limits). Every defense dollar reduces the limit available to pay a judgment. This is the reverse of the CGL, where defense is in addition to the limit. An adjuster reserving a professional liability file must reserve for indemnity plus defense together.
4. Consent to settle and the hammer clause. Because a settlement can end a professional's career or trigger a reporting obligation, the policy usually requires the insured's consent to settle. The hammer clause limits the insurer's exposure to the amount for which the claim could have been settled, plus defense to that date, if the insured refuses a settlement the insurer recommends. Modern soft hammer clauses share the excess (for example, 50/50 or 80/20).
5. The "wrongful act" trigger, not "accident." The insuring agreement responds to a negligent act, error, or omission in rendering professional services. Intentional wrongdoing, fraud, and personal profit are excluded, usually with a final adjudication requirement so that defense continues until the conduct is actually established.

E&O vs. CGL AT A GLANCE

                       CGL                    Professional Liability / E&O
Trigger          Occurrence (usually)         Claim made and reported
What is injured  Bodily injury, property      Economic loss from negligent
                 damage, personal/adv injury  professional services
Defense costs    IN ADDITION to the limit     INSIDE the limit (wasting)
Settlement       Insurer controls             Insured consent + hammer clause
Retro date       Not applicable               Critical; bars all prior acts

Closing the Loop on Texas Statutes. Bonds and professional liability sit in an unusual statutory position for a Texas adjuster. Bond claims are outside Chapter 542 and outside Chapter 462. Professional liability written by an admitted carrier is inside both. Professional liability written by an eligible surplus lines carrier is inside Chapter 542 — note the special 30-business-day and 20-business-day deadlines in §§ 542.055 and 542.057 — but outside guaranty association protection, because § 462.201 requires a policy issued by an authorized insurer.