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What kind of surety bond can be written with another bond as it’s subject?
Our articles have covered some of the oddities of the surety world: Seemingly crazy bond forms and rating procedures. Out of all of them, one is the strangest. An agent colleague called us on one this week, so let’s talk about this ugly baby.
- Inexpensive, but hard to get. Often collateral for more than the bond amount plus full indemnity is required.
- The bond penalty (dollar amount) may not be fixed.
- Banks and insurance companies can be both the applicant and beneficiary of such bonds.
- This bond “renews” for free – for years.
- It is a surety bond that can have another bond as it’s subject.
Sounds pretty weird? Raise your hand if you know.
It is a Lost Instrument Bond.
These bonds are required when an instrument such as a cashier’s check or stock certificate has been lost, and a replacement is desired. The bond protects the interests of the issuer, and is subject to claim if both the original and the duplicate are cashed. The bond applicant would be responsible for the financial loss – thus the common need for collateral.
The subject of the surety bond can be a government issued investment bond. So this is the one surety bond that covers another bond!
Bonding companies are not fond of these because they make a one-time annual premium charge, but the bond must remain in effect for a statutory term, typically years (ugh!)
Underwriters may refuse to provide a bond immediately after the instrument is lost. The concern is that the original may be found and the bond returned for a refund. The surety may require a cooling off period to see if the original is located (90 days?)
Instruments with a changing dollar value, such as shares of stock, are covered with an Open Penalty bond. This means the dollar value will automatically increase to cover the current value of the instrument, in the event of a claim. This is one more reason to make underwriters reluctant – and require more than 100% of the initial value in collateral.
Lost Instrument Bonds: The ugly babies of the surety world. So now you know. They aren’t ugly, they’re just “different!”
(BTW, the author thinks ALL babies are beautiful!)