What is the Difference Between Surety and Fiduciary Bonds?

Although oversight agencies and regulations are in place to help business transactions go as smoothly as possible, disruptive issues such as fraud and breach of contract do still occur. For smaller companies, these negative events represent immense financial loss and can even close the business down permanently. One way to reduce such risk is use of surety or fiduciary bonds, which serve as an insurance policy and are often used to underscore a business agreement.

Surety Bonds

Also known as security bonds, surety bonds serve as a promise to pay the recipient. They are especially common in connection with construction projects: contractors are generally required to obtain a surety/performance bond that guarantees payment to the property owner in the event that the contractor does not perform the work as specified in the contract or to guarantee that their work will comply with municipality licensing requirements.

With all surety bonds, a surety or insurance company serves as an intermediary between the two parties to the agreement. If one does not fulfill its contractual obligation, the surety companies covers the second party’s losses.

Fiduciary Bonds

Most corporations have insurance in place to protect them from certain types of losses, but not all policies cover internal situations like misappropriation of company funds or theft by an employee. Also referred to as “crime insurance,” fidelity bonds reimburse a company for losses or damages that can result from illegal acts by employees, such as fraud, theft, and embezzlement.

There are three primary types:

  • Named Schedule Bond – covers specific named employees, and applies only when a loss can be directly traced to an individual named on the bond.
  • Blanket Position Bond – covers all employees, even new ones, and ceases coverage of those who leave the company. Unlike with a Named Schedule Bond, employers do not have to prove who is responsible for the loss.
  • Primary Blanket Bond – similar to the Blanket Position Bond except that the amount of coverage is smaller.

 

 

Premiums for insurance bonds vary, and the costs depend on the amount of coverage required and, in the case of fidelity bonds, the number of employees covered under the policy. When a contractor applies for a bond, agents typically request the following insurer information:

  • Credit history
  • Personal finances
  • Business financial records

At Rosen Law, we have years of experience in matters concerning the investigation and defense of surety and fiduciary bond claims in both New York and Florida. We also represent parties involved in construction litigation, from subcontractors and contractors to suppliers, architects, and engineers. For questions about bonds and other aspects of construction law or to schedule a consultation, contact us today.

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Rosen Law LLC

Our attorneys, admitted to practice law in New York, Florida, New Jersey, Connecticut, Pennsylvania, and Georgia, practice within a wide range of legal areas including business and real estate litigation, Fair Labor Standards Act litigation, complex real estate transactions, preparation of condominium offering plans, business sale and purchase transactions, construction law and litigation, New York City tax abatements, estate planning, probate and probate litigation and much more.

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