These instruments guarantee the fulfillment of contract obligations. These contracts can involve both construction and other type of work or service required by public or privately-owned entities. Five such bonds fall into this class and are described thus in the manual of the Surety & Fidelity Association of America (SAA):

1.     Bid or proposal bond. This guarantees an owner (obligee) that a party bidding for a contract will, if the bid is accepted, enter into a contract and furnish the other necessary bonds. These include performance, payment, and maintenance bonds for carrying out the work. If the contractor fails to perform these tasks, the bid bond pays the obligee the difference between the defaulting party's bid and the next lowest bid.

2.     Performance bond. This guarantees the owner that work will be completed according to the contract specifications. A performance bond is the key bond in a work project because the owner of a project not only wants the work completed—usually within a specified time—but also completed according to specifications. If either or both of those promises are not fulfilled by the principal, the surety is obligated to satisfy the owner.

3.     Payment bond. This bond, also referred to as a “labor and materials” bond, guarantees that bills for labor and materials used in the work project will be paid as they become due. This coverage is usually automatically included in the performance bond so no additional charge is necessary. But, if this bond is written wholly apart from the performance bond, there is an additional charge.

4.     Maintenance bond. This bond carries the guarantee that faulty work of the principal will be corrected or defective materials will be replaced. A performance bond sometimes includes this maintenance guarantee for a period of one year without additional charge.

5.     Completion bond. This bond covers contracts that involve financing or design hazards. It is written in favor of a lender or lessor and guarantees completion of a building or improvement. It is also used where a contractor is responsible for the financing or the design of the contract.

The three types of contracts requiring bonds are: construction contracts; supply contracts; and miscellaneous contracts. For more information on contract bonds, see Contract Bonds. Print subscribers may find this information on the A.2 pages of the surety tab.

Class B contracts involve building construction and related subtrades, and cover the most difficult work to be done on a construction job. They include engineering, construction, concrete, and excavation work. Class B contracts also cover underground and underwater construction.

Class A contracts cover work that is not as difficult as Class B. Such work includes earthmoving of a non-excavation nature and glazing contracts.

Class A-1 contracts generally include construction work that is not as difficult as classes A or B. Class A-1 also covers contracts for the furnishing or installing of various equipment or services. The SAA manual says that these contracts are “scientific, technical, or data processing” in nature and provide for the “furnishing of personnel or facilities” to the obligee.

The coverage of a contract bond is usually prescribed by the obligee or statute. If a bond is written “in conformance with terms” of a statute, then it carries whatever liability the statute requires.

These bonds are required of those who must obtain licenses or permits from cities, towns, or political subdivisions before they can proceed with various activities. These bonds, although used for a variety of purposes, usually guarantee that the persons who post them will comply with statutes, regulations or ordinances that regulate their activities. An operator of a liquor store, for example, may have to post such a bond guaranteeing that liquor will be sold in strict compliance with alcoholic beverage control laws. Electricians and plumbers also must post these bonds guaranteeing that their work will conform to the specifications of a given building code.

There are two broad classifications of license and permit bonds:

1.     Those that indemnify a governmental body for the principal's failure to comply with an applicable law.

2.     Those that give a third party the right to pursue the principal—in the third party's own name—for loss or damage incurred by that third party due to the default of the principal.

A license or permit bond carries a term that corresponds with the period covered by the license or permit issued to the principal. The right to file a claim under the bond continues for varying periods, depending upon the state in which it was issued. Termination of a license or permit bond depends upon the following:

1.     whether or not termination is allowed by law;

2.     the ordinance under which the bond is required;

3.     the terms of the bond itself.

There are also two types of U.S. government bonds that fall within this category: excise tax and custom bonds. Excise tax bonds protect public revenues. They assure that the principal will comply with all laws and regulations regarding payment of taxes, fines, or other charges due the government.

Sometimes the bond is payable in full if the principal does not comply with a certain law. Some excise tax bonds allow the principal to defer payment of excise taxes for a given period after products have been withdrawn from bonded premises.

Excise tax bonds may cover just a single shipment or transaction. At other times they cover the operation of a business, such as a license to operate a distillery. These bonds may typically be cancelled by the surety with anywhere from a 10 to a 90-day notice.

The United States Customs Service has developed one standardized bond, Customs Bond Form 301, that covers most customs' transactions. Form 301 can be used to cover either a single entry or shipment or a series of such on a continuous basis. These bonds assure that the principal will pay all duties, taxes, etc. that are assessed against the principal. They also guarantee that the principal will return any goods to their country of origin if the U.S. Customs Service determines that the goods were illegally imported. Finally, these bonds guarantee that the principal will comply with all U.S. laws governing the importation of goods.

When covering a single shipment, Customs Bond Form 301 is noncancellable. If it is written on a continuous basis, form 301 may be canceled by the surety with a 30-day written notice.

For more on license and permit bonds, see License and Permit Bonds. Print subscribers may find this information on the A.3 pages of the surety tab.

Appointed and elected public officials require these bonds. They guarantee that public servants will faithfully perform their duties for the protection of public interests. Such bonds are under the jurisdiction of the Surety & Fidelity Association of America (SAA). See Public Officials Bonds, for a discussion of public employees bonds. Print subscribers may find this treatment on pages A.4 of the surety tab.

Though used for a variety of court proceedings, judicial (or court) bonds guarantee that a person or firm, as the principal, will fulfill certain obligations specified by statute, such as faithful performance or financial responsibility for the benefit of another (obligee). Failing to do so, the surety will be liable for damages up to the bond amount or penalty.

Court bonds are used in judicial proceedings, in admiralty proceedings, or by fiduciaries.

1. Judicial Proceedings. Courts of equity require these bonds to settle arguments involving specific performance, rather than arguments involving money damages. Probate courts require them to assure the faithful disposition of property of others. The primary purpose of court bonds is to protect persons (obligees) against loss in the event principals (persons who purchase these bonds) do not succeed in proving that they are legally entitled to the remedy they sought against the obligees.

These court bonds can be classified into two groups:

A.     bonds in civil proceedings, i.e., plaintiff and defendants bonds; and

B.     bonds for release of persons in criminal or civil proceedings, such as bonds for bail.

For an in-depth discussion of these bonds, see Judicial Bonds. Print subscribers may find this treatment in the surety tab, page A.5.

2. Admiralty bonds. A complaint (a “libel”) brought against a U.S. ship is handled exclusively in U.S. District Courts. The person bringing the action is called the “libellant.” An action brought against a ship is said to be in rem. Unless the owner of the ship posts a bond, the U.S. Marshal may hold it as security for the claim.

For an in-depth discussion of these bonds, see Admirality Bonds. Print subscribers may find this treatment in the surety tab, page A.6.

3. Fiduciary bonds. These guarantee that persons entrusted with the care of property belonging to others under various forms of estates will exercise their duties faithfully, account for all property received, and make good any deficiency for which the courts hold fiduciaries liable.

The majority of fiduciaries are appointed in probate proceedings. It is for this reason that fiduciary bonds are referred to as probate bonds. These courts are called upon to:

A.     appoint administrators to settle estates of deceased persons who die without wills;

B.     appoint persons to serve as guardians of minors and incompetents; and

C.     select receivers or liquidators to handle bankrupt properties.

For an in-depth discussion of these bonds, see Fiduciary Bonds. Print subscribers may find this treatment in the surety tab, page A.7.

These bonds are those required by Federal agencies that regulate the activities of businesses, such as manufacturers, wholesalers, and large retail outlets that import commodities from other countries.

They guarantee that the bondholders will faithfully comply with Federal standards, and they will pay any taxes or duties that may accrue, or pay the penalties should they fail to do so.

This group encompasses all those that cannot be classified into any other particular group. It would be impractical to mention all of the bonds that are classified in this category for two reasons. First, this group comprises the largest number of different type bonds. And, second, what may be considered as a miscellaneous surety bond with one insurer does not necessarily hold true for another insurer.

Some of the bonds that fall into this category include:

1.     Auctioneers' bonds, guaranteeing the faithful accounting of proceeds of sales.

2.     Brokers or commission merchants bonds, guaranteeing a proper accounting of proceeds.

3.     Insurance agents bonds, guaranteeing indemnity to insurers against any penalties that may arise through the unlawful act of agents.

4.     Lost instrument bonds, guaranteeing the obligees against loss in case original instrument bonds, e.g., negotiable securities, turn up in the possession of others.

5.     Patent infringement bonds, guaranteeing against such infringements.

6.     School teacher bonds, guaranteeing completion of school year contracts upon receipt of vacation pay in advance. See Miscellaneous Types of Bonds for more on miscellaneous surety bonds. Print subscribers may find this treatment on page A.8 of the surety tab.