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Glossary of Terms - Bond Surety

Glossary of Terms


Acceleration is when a contractor is compelled by the owner, for a fee, to complete the project ahead of schedule. Changes in contract time, whether delay or acceleration, increase contractors cost and often become the subject of a claim.

Acceleration clause

An Acceleration Clause in a contract that states that if a payment is missed, or some other default occurs, then the contract becomes fully due immediately. This is a typical clause in a loan or finance contract and means that even if one payment is missed, the agreement to pay at regular intervals is voided and the entire amount becomes due and payable immediately.

Account Current

An Account Current is the billing statement an insurance company sends to their producer.

Accounts Receivable Turnover

Accounts Receivable Turnover measures the internal collection efficiency and the potential bad debts. The calculation is: Acct. Rec. X 360 /Annual Revenue. Surety Companies are looking for a figure of 60 days or less.

Act of God

An Act of God is an event that is caused solely by the effect of natural causes and without any interference by humans. Insurance contracts often exclude coverage for "Acts of God" such as hurricanes, floods or earthquakes.


An addendum is written information adding to, clarifying or modifying the bidding documents. The addendum becomes part of the contract documents when the construction contract is executed.

Additional Insured

A person, company or entity protected by an insurance policy in addition to the insured.


Adjudication is most frequently encountered in the construction industry in the U.K. Adjudication is a binding decision made by an appointed neutral party, designed to provide a speedy, resolution to enable work to continue on site without interruption.


An Adjuster investigates and settles losses for an insurance carrier. In the surety industry, they are more often referred to as claims representatives, claims attorneys, or consultants.

Administered Arbitration

The parties select an agency which serves as an intermediary between parties and the arbitrator . The agency's fees are in addition to the arbitrator fees.


An administrator is an individual who has the legal right to direct the affairs of the estate of a decedent or a person who directs and manages the affairs of a company.

Admitted Carrier

A company doing business, under a Certificate of Authority issued by the Texas Department of Insurance, subject to the laws and regulations of the State of Texas.

Alternative Dispute Rider to Bond

Increasingly, Sureties are embracing mediation and other techniques to avoid and resolve disputes, instead of litigating. This rider allows for this non-binding and less formal option.

Advance Payment Bond

An Advance Payment Bond guarantees repayment by the principal of the funds advanced in connection with a construction supply or other type of contract.

Advisory Opinion

An Advisory Opinion is a non-binding opinion or recommendation by an arbitrator, facilitator, mediator, or neutral third party of its interpretation of the law and the facts in specific case.


The authorized representative of an insurance company.

Agent or Broker of Record Letter

Surety companies will work with only one agent representing one policy at any one time. In order to change agent representatives, the Surety will require the customer to provide a signed and dated Broker of Record Letter or Letter of Authorization, with instructions to change agents. The Surety may send a copy of the letter to the original agent or broker, allowing the original agent an opportunity to obtain a rescinding broker of record letter.

AIA Documents

The AIA Contract Documents Program is well established program that develops standardized contract forms and administrative procedures, providing the building industry with a basis for nationwide uniformity in contractual relationships and in the design and construction process.


An Aleatory is a type of contract, whose payment is dependent on the occurrence of a contingent event, such as injury to the insured person in an accident or fire damage to their insured building.


An All-Risk Insurance Policy endeavours to cover any loss or damage to an insured property unless such loss is specifically excluded by the policy language.

Alternate Bid

An Alternate Bid is the amount stated in the bid to be added or deducted from the base bid amount proposed for alternate materials and/or methods of construction.

Alternative Dispute Resolution

An "ADR" is a private method of resolving conflict that avoids the courts system in favour of mediation or arbitration. The advantages of ADR are speed and cost efficiency.

American Arbitration Association

The “AAA” is the largest full-service ADR provider in the America. They assists in the design and implementation of ADR systems for corporations, unions, government agencies, law firms and the courts. They also administer mediation, arbitration, and dispute review boards.

American Insurance Association

The American Insurance Association ("AIA") is the leading property and casualty insurance trade organization, representing more than 370 insurers that write more than $77 billion in premiums each year.


An Application must be completed by an applicant in order to be issued a fidelity or surety bond. On a surety bond application, an applicant may also agree to indemnify the surety in the event of loss.

Application for Payment

An Application for Payment is a contractor's written request for payment for completed portions of the work and, for materials delivered for the respective project.


An Appointment certifies a Surety Company’s desire for an agent to represent that company in the sale of insurance or surety products.


Arbitration is an alternative dispute resolution method by which an independent, third party ("arbitrator") is appointed to hear and consider the merits of the dispute. The Arbitrator then renders a final and binding decision called an award.

Arbitration Agreement or Arbitration Clause

An Arbitration Agreement is a contract that specifies the binding nature of the arbitration, including if the arbitrator’s decision may be enforced in court, and whether the arbitration proceedings will be confidential.


An arbitrator is independent and impartial 3rd party, selected by the parties or on their behalf by another appointing authority, on the basis of their expertise, reputation and experience.

As-Built Drawings

As-Built Drawing, also known as Record Drawings, are change made to the Contract Drawing to reflect changes made during the construction process. It is good practice to make As-Built drawings by marking the changes on reproducible drawings for the duplication purposes later.

Association of Attorney Mediators

AAM is a non-profit trade association of qualified, independent attorney-mediators.

Association of Independent Sureties

This is the association for the many small and mid-sized surety companies in the USA.


An attachment means to seize a debtor's property.


Attestation is the act of witnessing another signing a legal document, such as a will or power of attorney, and then signing to that affect.

Attorney in Fact

The person to whom authority is given under a Power of Attorney.

Attorney Work Product Privilege

A rule that protects materials prepared by a lawyer in preparation for trial from being seen and used by the adversary during discovery or trial.

Attorney’s Fees

The usual meaning of the words “attorney's fees” is the consideration that a litigant pays in exchange for legal representation.

Attorney-Client Privilege

The Attorney Client Privilege is a rule that keeps communications between an attorney and her client confidential and bars them from being used as evidence in a trial, or even being seen by the opposing party during discovery.

Authenticity, Bond

Obligees should verify the authenticity of surety bonds they are accepting. The most reliable way to authenticate a surety bond is to contact the issuing surety company directly. The Surety Association of America has published a guide and is available at

Authority, Agent’s Apparent

Authority, Agent’s Apparent occurs when the agent oversteps actual authority, and when inaction by the surety or insurance company does nothing to counter the public impression that such authority exists.

Authority, Agent’s Express

Express Authority is exemplified by the agent’s agency agreement, signed by both the agent and sponsoring company. It grants power of attorney to the agent to take certain acts to bind the company to specified obligations.

Authority, Agent’s Implied

Although certain functions an agent may perform are not set out in the express authority documentation (agency agreement or power of attorney), the routine performance of these may lead the public to reasonably believe the agent has been given express authority, where none exists.


The decision of an arbitrator in a dispute submitted to him or her.

Back Charge

Back Charges are billings for work performed or costs incurred by one party that, in accordance with the agreement, should have been performed or incurred by the party who billed. Owners bill back charges to general contractors, and general contractors’ bill back charges to subcontractors for charges including cleanup work or to repair something damaged by another subcontractor.

Balance Sheet

The Balance Sheet is the financial statement of a business that discloses the assets, debts, investments, and net worth.

Bank Depository Bond

A Bank Depository Bond is a bond insuring the deposit of public funds.

Bankruptcy – Common Types

Chapter 7 - Requires the liquidation of a business and allows for the proceeds from the sale of its assets to be used to pay its creditors.

Chapter 11 – Allows the business to continue its operations and retain its assets, subject to a plan of reorganization

Bankruptcy Trustee Bond

A Bankrupt Trustee Bond offers protection to the beneficiaries of a bankruptcy. The bond assures the beneficiaries that the appointed bankruptcy trustees will perform their duties according to the court rulings.


Positional Bargaining focuses on demands, and counter-demands of disputing parties, sometimes leading to a bargaining process where parties trade concessions and demands.

Interest-based bargaining focuses on the interests underlying one's position on an issue. The parties explore their needs, concerns, and eventually work on developing mutually acceptable solutions that meet as many of the disputants' interests as possible.

Baseball Arbitration

Baseball Arbitration is a process used increasingly in commercial disputes. It entails each party submitting a proposed monetary award to the arbitrator. At the conclusion of the hearing, the arbitrator chooses only one award without any modification. This approach limits on the arbitrator's discretion and gives each party an incentive to offer a reasonable proposal, in the hope that it will be accepted by the decision-maker. Another variation, referred to as "Night Baseball" arbitration, requires the arbitrator to make a decision without the benefit of either parties' proposals and then to make the award to the party whose proposal is closest to that of the arbitrator.

Bid Bond

A Bid Bond assures the owner that, upon acceptance of the contractor's proposal, the contractor will proceed to enter into a contract and will furnish Performance and Payment Bonds if required by the bid documents. Failure to satisfy these requirements generally leads either to forfeiture of the Bid Bond (usually in the penal sum of 5% to 20% of the bid) or more commonly, payment of the difference between the bidder's price and the second low bidder's price or the bond amount, whichever is less. Bid bonds are often required on public projects where formal competitive bidding is required, but are less frequently used on private projects.

Bid Listing

A Bid Listing is a submission, in which a general contractor must declare with its bid the names of the subcontractors they intend to use if awarded the contract.

Bid Shopping

Bid Shopping is a practice by which contractors, both before and after their bids are submitted, attempt to obtain lower prices from potential subcontractors and material suppliers than the contractors' original estimates and bids were based on. Where bid listing is required, this practice is more difficult.

Bills Paid Affidavit

A Bill Paid Affidavit, executed by a contractor or subcontractor stating, under oath, that it has or will pay all of its bills on a project. While the affidavit does not relieve the recipient from responsibility for claims that may be filed if the affidavit is not truthful, the person signing the affidavit could face civil and criminal sanctions for filing a false affidavit.

Blanket Bond

A Blanket bond protects an employer from loss due to a dishonest act an employee.

Blanket Position Bond

A Blanket Position Bond protects an employer from loss due to dishonest acts of employees, including embezzlement. The bond is issued for a fixed amount and each position is covered for this amount.

Blanket Position Public Official Bond

A Blanket Bond protects the insured from losses due to dishonest acts of public employees. The bond is issued for a fixed amount and each position is covered for the said amount.

Blanket Public Official Bond

A Blanket Public Official Bond is a bond that protects from loss due the dishonest act

Bonding Around a Lien

Bonding Around a Lien is the process of posting a bond to indemnify a property owner, title company, or lender from liability for a filed mechanic’s lien. The process may take the form of statutory bond to release a recorded lien, or a common law obligation to indemnify parties who rely on such a bond.

Bonding Company

A Bonding Company is that who underwriters the bonding risk. See “Surety”.


Bonds are three-party agreements in which the issuer of the bond (the surety) joins with the second party (the principal) in guaranteeing to a third party (the obligee) the fulfillment of an obligation on the part of the principal. An obligee is the party (person, corporation or government agency) to whom a bond is given. The obligee is also the party protected by the bond against loss.

Bonus-Penalty Clause

A Bonus-Penalty Clause is a positive or negative incentive to comply with a schedule. A bonus is paid for timely performance; a penalty is assessed for untimely performance. The dollar amount of the bonus and penalty must be equal.

Book of Business

The number, size and type of accounts that a broker or agent services, and upon which he earns commissions.


A Bordereau is a report, listing the risks reinsured, that the ceding company regularly provides to the reinsurer. This report typically includes the insured's name, premium basis, premium and the amount of coverage. This type of report could also be provided to the insurer, from the agent of broker.

Broad Form Indemnity

See, Indemnity Clauses

Broad Form Property Coverage including Completed Operations

A coverage extension that is of great value to the general contractor as respects "completed operations" property damage liability claims. Without it, the normal Comprehensive General Liability policy will not respond for "completed operations" claims (i.e., claims rising out of work performed on behalf of the insured by subcontractors). With this coverage extension, this exposure is covered. Additional broadening coverage features are also included, but none as important as the above to the general contractor.


A Broker is an Individual or organization representing a contractor in soliciting, negotiating or buying a surety bond and rendering services incidental to these functions. The term has become virtually synonymous with the term “agent” in the USA, while Canada have separate licenses each class, based on brokers representing numerous insurance carriers, while agents typically represent only one, ie. AllState.

Builder’s Risk Insurance

Builder’s Risk Insurance indemnifies for loss of or damage to a building under construction. Insurance is normally written for a specified amount on the building and applies only in the course of construction. Coverage customarily includes fire and extended coverage and vandalism and malicious mischief. Builders risk coverage can be extended to a "special" form as well. The builders risk policy also may include coverage for items in transit to the construction site (up to a certain percentage of value) and items stored at the site.

Business Plan

A Business Plan is a blueprint and communication tool for your business. A device to help you, the owner, set out how you intend to operate your business and detail how you expect to achieve the goals and forecasts listed therein.

Buy-Sell Agreement

A Buy-Sell Agreement is an agreement made by the owners of a business to purchase the shares of a disabled or deceased owner. The value of each owner's share of the business and the exact terms of the buying-and-selling process are established before death or at the beginning of disability.


Capacity is a term that refers to the maximum size of a bond which a surety is able to write. Capacity is determined by a combination of factors, including the amount of capital and surplus a Surety possesses, available reinsurance, and regulatory restrictions.

Capital and Surplus

Capital and Surplus is the sum of paid up capital, gross paid in and contributed surplus and unassigned surplus.

Capital Retention Agreement

A Capital Retention Agreement is a partial waver of personal indemnity by which Surety Bonds are occasionally granted where the contractor agrees to maintain certain financial ratios, such as working capital or equity.

Captive Agent

A Captive Agent is a licensed insurance agent who sells insurance or bonds for only one company.

Captive Insurance Company

A Captive Insurance Company is owned solely or in large part by one or more non-insurance entities for the primary purpose of providing insurance coverage to the owner(s). A Captive Insurance Company may be a non-admitted, non-resident, or a foreign insurer. Sometimes it may provide reinsurance to a self- insured or a domestic company.

Cardinal Change

A Cardinal Change is a fundamental change by the obligee in the nature of the bonded contract and is a breach of contract which discharges the principal or contractor and the Surety from its obligations to perform further.


A Caucus is a private meeting or series of meetings that take place in concert with a dispute resolution process. A caucus can also include a meeting between the neutral third party and each of the interested parties separately. In large scale group processes, it can consist of an informal meeting of parties with similar interests. The caucus serves to give parties a chance to create new alternatives, clarify their proposals and interests, gather information, and to allow for a "cooling-down period."


To Cede, is to transfer all or part of a risk written by an insurer (the ceding, or primary company) to a reinsurer.

Ceding Company

A Ceding Company is the insurer which cedes all or part of the insurance or reinsurance it has written to another insurer.

Certificate of Insurance

A Certificate of Insurance is a statement of coverage issued to an individual insured under an insurance contract, outlining the insurance benefits and principal provisions applicable to the member.

Change Order

A Change Order is a written document between the owner and the contractor , authorizing a change in the work or an adjustment in the contract sum or the contract time. A change order may be signed by the architect or engineer, provided they have written authority from the owner to do so and that a copy of such written authority is furnished to the contractor upon request. The contract sum and the contract time may be changed only by change order. A change order may be in the form of additional compensation or time; or less compensation or time known as a Deduction (from the contract) the amount deducted from the contract sum by change order.


Claimant is a term used to describe an individual making a claim against a bond, or one making a claim in a non-judicial dispute resolution proceeding. Those persons or entities who are entitled to make a claim against a statutory bond are defined in those statutes. In the case of non-statutory bonds, the definition of a claimant will usually be set forth in the bond.

Claims Made Policy

A Claims Made Policy is a liability insurance policy under which coverage applies to claims filed during the policy period.


Collateral is additional security that a Surety may require collateral to reduce their risk of the bond. Collateral is required for higher risk principals or unusual obligations. There are many forms in which collateral may be provided, including cashier’s checks, certificates of deposit or irrevocable letters of credit. After all obligations of the bond have been met, the obligee releases the Surety from the obligation under the bond and the collateral is returned to the principal.

Combined Ratio

A Combined Ratio is a measure of the relationship between dollars spent for claims and expenses and premium dollars taken in; more specifically, the sum of the ratio of losses incurred to premiums earned and the ratio of commissions and expenses incurred to premiums written. A ratio above 100 means that for every premium dollar taken in, more than a dollar went for losses, expenses, and commissions.

Commercial Bond

A Commercial Bond is required by businesses, other than contractors, to guarantee completion of service.

Commercial Blanket Bond

A Commercial Blanket Bond provides a single amount to cover the dishonest acts of a company’s employees.


Commission is the portion of an insurance premium paid by the insurer to an agent or broker for their services in procuring and servicing an insurance or surety account.

Common Law Bond

A Common Law Bond is a non-statutory bond, one on which the rights and obligations are determined by it terms or the law of contract.

Completed Operations

Completed Operation is the liability arising out of faulty work performed away from the premises after the work or operations are completed. This term is applicable to contractors, plumbers, electricians, repair shops, and similar firms. This form of liability insurance provides coverage for bodily injury and property damage rising from completed or abandoned operations, provided the incident occurs away from premises owned or rented by the insured. Operations are deemed completed at the earliest of: (1) when all operations to be performed by or on behalf of the insured under contract have been completed; (2) when all operations to be performed by or on behalf of the insured at the site of the operations have been completed; (3) when the portion of work out of which injury or damage rises has been put to its intended use by a party other than the contractor or subcontractor.

Completing Contractor

A Completing Contractor, in a Surety default situation, is the contractor retained by the Surety or the obligee to complete the bonded obligation. Occasionally, the defaulting contractor may serve in this capacity, although under the Surety’s supervision and control.

Completion Agreement

A Completion Agreement is signed by the Surety for a defaulting contractor and a contractor chosen to complete the bonded obligation. The purpose of the agreement between the Surety and replacement contractor is to delineate the areas of responsibility with respect to completion of the bonded contract and payment therefor. These responsibilities may be outlined in a separate agreement between the Surety and replacement contractor, or in one instrument executed by the Surety, obligee and replacement contractor.

Completion Bond

A Completion Bond is a bond issued to a mortgagee (lender). The bond guarantees that the construction for which the mortgagor has borrowed money will be completed and will be able to serve as collateral for the mortgage upon completion of the project.

Condition Precedent

A Condition Precedent is a contractual condition that suspends the coming into effect of a contract unless or until a certain event takes place. Many residential real estate contracts have a Condition Precedent which states that the contract is not binding until and unless the property is subjected to a satisfactory home inspection. Compare with "condition subsequent".

Consent of Surety

Many contracts require, and good practice dictates, that a Consent of Surety be obtained in connection with final payment under a bonded contract, or any time that payment is being made in the face of potential claims or defaults. Consent dictates that the Surety cannot be heard to later complain that contract balances, to which it looks for security, were released prematurely.

Consequential Damage

Consequential Damages are damages that resulted as a consequence rather than directly from some failure to meet an obligation. For example, if a contractor agrees to build a hotel for $ 1 million and defaults, and the owner spends $ 200,000 more than the original $ 1 million to complete the work, the $ 200,000 is a direct damage. If the opening of the hotel was delayed beyond the prime tourist season, causing the hotel operator loss of revenues, and potential future business, those losses are Consequential Damages.


A Conservator is a guardian, or entity, appointed by the court, to manage the affairs of and protect the interest of a party who is incapable of doing it for themselves. This incapacity is typically due to incompetence or age of minority.


Constructability is the optimizing of cost, time, and quality factors with the contracting structures and techniques used on a project; accomplished by matching owner contracting requirements with available construction industry practices.

Construction Industry Rules of the American Arbitration Association

Representatives of the twenty-two construction industry organizations constitute the National Construction Dispute Resolution Committee (NCDRC) of the American Arbitration Association. This committee is the sponsor of the arbitration and mediation procedures specially designed for the construction industry by the AAA. The rules may be found at

Construction Management

Construction Management is construction delivery method where the construction manager serves as either the agent (“Construction Manager-Agent” or “Pure Construction Manager”) for the project owner, or as the general contractor (“Construction Manager at Risk”) for a project, providing pre-construction and construction services.

Constructive Acceleration

Constructive Acceleration occurs in the absence of an owner-directed acceleration, such as where the owner has refused a valid request for time extensions or threatened other action which requires the contractor to accelerate its work to avoid liquidated damages, or other loss. The classic case is when a request for a time extension for excusable delay is denied and the contract provides liquidated damages for late completion. The law construes this as an order by the owner to complete performance within the originally specified completion date, a shorter period at higher cost than provided for in the contract. The Constructive Acceleration doctrine allows recovery for the additional expenses the contractor can establish.


Contingency is an amount or percentage of the total construction budget included in a guaranteed maximum price contract to address additional costs arising during the construction of the project. The contractor’s contingency is usually under the control of the contractor and covers such things as unanticipated costs, minor mistakes in bidding or performance of work, defaults by suppliers and subcontractors, etc. An owner’s contingency is usually a fund outside of the contract sum, controlled by the owner, for changes in the work or schedule not contemplated at bid time. The failure to identify the nature of the contingency, its use and control, is a frequent cause of dispute which could be easily avoided by careful contract drafting.

Contingent Payment Clause

A Contingent Payment clause in a subcontract that makes payment from the owner to the general contractor a condition precedent to the subcontractor’s right to payment from the general contractor. Also known as a “pay if paid” clause, contrasted by “pay when paid” clauses that speak to the timing of payment rather than liability for payment.


A Contract is a covenant or agreement between two or more parties to do or not to do certain things. The terms of a contract are expressed, either orally or in writing and each party agrees to them. Same as an “Agreement.”

Contract Balance

Contract Balance is the original contract price, including adjustments for changes, less the amount paid to the contractor in accordance with the contract terms.

Contract Bond

A Contract Bond is given to secure the performance of a contract. Frequently, two bonds are required – A Performance Bond to cover performance and a Payment Bond to cover payment of certain labour and material bills.

Contract Price

Contract Price is the whole sum of money which passes from the owner to the contractor when final settlement is made between the parties to the contract. The contract price is used as the basis for the premium charge on most types of construction and supply contract bonds.

Cost Plus or Cost Plus Fee Agreement

Cost Plus Fee is an agreement under which the contractor is reimbursed for its direct and indirect costs and, in addition, is paid a fee for its services. The fee is usually stated as a percentage of cost, but may be a fixed amount. The agreement may or may not include a guaranteed maximum price or a savings split.


One of a group of Sureties directly participating in a bond with obligations joint and several.


A Countersignature is required of a licensed domiciled agent or representative, to validate a bond, in some states.

Court-Annexed Mediation

Court-Annexed Mediation is any ADR process which parties may be required or advised to undertake by the court, or an ADR facility which is offered by the court.

Court and Probate Bond

A Court and Probate Bond guarantees proper performance of fiduciary duties and compliance with court orders. For example, the execution of a will.

Current Ratio

The Current Ratio is current assets to current liabilities. Bond underwriters like this ratio to be 2 to 1 or better on the balance sheets of contractors for whom they are considering contract bonds. If it drops below 1.0, the ability to pay bills is impaired. If it is much greater than 2.0, there is a possibility that assets are not being used efficiently to generate new revenue.

Cut Through Clause

A Cut Through Clause is a rider, or endorsement occasionally found in treaties which allows the obligee on a bond to recover directly from the reinsurer in the event of a failure by the Surety (reinsured) to pay a loss due to specified circumstances. Because there are entirely separate contractual relationships as between obligee and surety (reinsured) and between reinsured and reinsurer, there is no privity of contract between insured and reinsurer absent of such a clause.


d/b/a is a common abbreviation meaning "doing business as”.


In a lawsuit, money awarded to one party based on injury or loss caused by the other are referred to as Damages. There are many different types or categories of damages that occasionally overlap, including: compensatory, punitive, nominal, consequential, and treble.

Debt to Net Worth Ratio

A ratio of total debt to net worth that measures the equity the owners have in the construction company compared to the interests of outsiders. Sureties look for a ratio of 3:1 or less.


The Deductible is an agreed to and specified sum to be deducted from the amount of loss and assumed by the insured.


Default is a failure to perform a legal duty, observe a promise, or fulfill an obligation. “Default” is often used when describing failure to make a payment on a debt once it is due.

Default Insurance

Default Insurance is a relatively new form of insurance that protects an insured against the losses caused by the defalcation of another party.


A Defendant is the person, or the entity, being accused in a court case.

Defendant Bond

A Defendant Bond guarantees payment of damages if a law suit is decided in favour of the plaintiff. These types of bonds often require collateral.

Delivery Methods

Delivery Methods are arrangements regarding contracting for the design, construction, and delivery of construction projects. Examples would include Construction Management (both Pure/Agency, and At Risk), Design-Build, and Design-Bid-Build.


Design-Bid-Build is the most common construction delivery method. It is when the owner contracts with a design professional, and requests bids from contractors separately.


Design-Build is a construction delivery method where a single entity is contracted to provide both design and construction.

Direct Writer

Direct Writer is the industry term for a company which uses its own sales employees to write its policies, instead of third party brokers or agents.

Direct Written Premium

Direct Written Premium is the entire premium arising from bonds or policies issued directly by the primary insurance company to policyholders.

Directed Suretyship

Directed Suretyship is when the Owner designates a specific Surety Company from which contractors must obtain surety bonds. The federal government and several states have enacted legislation expressly prohibiting this practice.

Dispute Review Board or DRB

Dispute Review Boards are a construction dispute avoidance and resolution technique involving the selection of three respected and impartial observers before construction begins. The Board meets at the job site periodically and are provided with the contract plans and specification. They become familiar with the project procedures and the participants, and are kept abreast of job progress and developments. When any dispute arises that cannot be resolved by the parties, it is referred to the DRB for a non-binding ruling which typically must be followed pending the exercise of other contract dispute resolution procedures.

Do Nothing Option

After investigating and considering all issues associated with a default, a Surety may determine that it, indeed, has no obligation to perform and may communicate this to the oblige. This term has often been misunderstood to refer to a Surety’s supposed option to simply stand by its principal’s position without the benefit of further investigation and analysis. Most responsible sureties would suggest the latter option does not really exist as litigation surely follows.

Dual Obligee Bond

Dual Obligee Bond is a bond which names as additional obligee a lender or other party, putting them in a position to invoke the performance features of the bond. Obligees are most often added to the bond by a Dual Obligee Rider to the bond, rather than being named in the body of the bond.

Eichleay Formula

The Eichleay formula, is intended as a mechanism for computing the compensation a contractor can appropriately recover for unabsorbed overhead due to a Government caused suspension or delay. The formula first determines the pro rata share of the contractor’s total overhead that is allocable to the delayed contract. It then converts that into an amount per day, and finally the appropriate daily rate is multiplied by the number of days for which compensation is owed.

Equitable Subrogation

Equitable Subrogation stems from the notion that those contract proceeds that are reserved for disbursement until the contract's completion are as much for the indemnity of him who may be a guarantor of the performance of the contract as for him for whom it is to be performed. It is well settled in our law that the Surety whose funds go to discharge contractor's obligations is thereby subrogated to the rights of the owner to apply the contract balances to the completion of the project and payment of bills incurred in that connection. The completing Surety is subrogated to the rights of other parties to the bonded project as well. A Surety that fulfills a defaulting contractor's obligations is subrogated to the rights of (1) the contractor, insofar as it is due receivables, (2) the material men and labourers who may have been paid by the Surety, and (3) the owner for whom the project was completed. The completing Surety's right of subrogation arises in equity as an outgrowth of the Suretyship relationship itself; it is not dependent on assignment, lien or contract.

Employee Retirement Income Security Act ( E R I S A)

The ERISA is a federal law, established in 1974, to protect the retirement assets of all Americans. The law set out legal guidelines for managing private pension plans and investment practices. The law ensures that fiduciaries do not misappropriate funds.

Errors & Omissions Insurance

E&O Insurance is a liability insurance policy that provides protection against loss incurred by a client because of some negligent act, error, or omission by the insured.


Professional fair and honest standards of conduct.

Evaluative Mediation

Evaluative Mediation is a process whereby an evaluative mediator assists the parties in reaching resolution by pointing out the weaknesses of their cases, and predicting what a judge or jury would be likely to do. An evaluative mediator, usually an attorney, might make formal or informal recommendations to the parties as to the outcome of the issues. Evaluative mediators are concerned with the legal rights of the parties rather than needs and interests, and evaluate based on legal concepts of fairness. Evaluative mediators meet most often in separate meetings with the parties and their attorneys, practicing “shuttle diplomacy”. They help the parties and attorneys evaluate their legal position and the costs vs. the benefits of pursuing a legal resolution rather than settling in mediation. The evaluative mediator structures the process, and directly influences the outcome of mediation.

Evergreen Clause

An Evergreen Clause is one that specifically states the expiration of a letter of credit will not take place without notice by the issuer and one that allows the issuer to conduct an annual review of the party's financial condition. If prior notice of expiration is not given by the issuer, the letter of credit is automatically extended for one year.

Excess of Loss Reinsurance

Excess of Loss Reinsurance is a generic term describing reinsurance which, subject to a specified limit, indemnifies the ceding company against the amount of loss in excess of the specified retention. It includes various types of reinsurance, such as Catastrophe, Per Risk, Per Account, and Aggregate Excess of Loss.

Expense Ratio

The Expense Ratio of a company is the operating expenses including acquisition costs to premiums written or earned.


An executor is a person or and entity appointed in a will and approved by the court, to settle the estate of a decedent.


A collaborative process involving the use of a neutral third party (facilitator) to design and oversee many interested parties or stakeholders, as opposed to mediation which tends to focus on a single issue dispute between two parties.

Facilitative Mediation

In facilitative mediation, the mediator structures a process to assist the parties in reaching a mutually agreeable resolution. The mediator asks questions; validates and normalizes parties' points of view; searches for interests underneath the positions taken by parties; and assists the parties in finding and analyzing options for resolution. The facilitative mediator does not make recommendations to the parties, give his or her own advice or opinion as to the outcome of the case, or predict what a court would do in the case. The mediator is in charge of the process, while the parties are in charge of the outcome, rather than the parties’ attorneys.


A Facilitator is a person competent in the use of dispute resolution who provides a neutral's services to groups (usually more than two) involved in a dispute or conflict. The facilitator provides procedural assistance to the parties, enhancing information exchange and working with the parties to develop and evaluate possible agreements that could lead to a resolution.


In the context of a construction contract, a Fee is the sum, either fixed, percentage or imputed that the contractor receives to cover his home office overhead and profit.

Fidelity & Surety Committee of the ABA

A subcommittee of the Tort and Insurance Practice Section of the American Bar Association , they are one of the most active in the American Bar and are the source of most scholarly writing and educational materials on surety and fidelity claims law and practices in the U.S.

Fidelity Bond

Fidelity Bonds are designed to guarantee honesty of employees. These bonds cover losses arising from employee dishonesty and indemnify the principal for losses caused by the dishonest actions of its employees.


A Fiduciary is a court appointed person or entity who is obligated to handle the affairs of the client.

Fiduciary Bond

A Fiduciary Bond guarantees that a fiduciary will perform all the duties in the best interest of the ward or estate.

Financial Guarantee Bond

A Financial Guarantee Bond guarantees that others will pay sums of money due. A Sales Tax Bond, for instance, guarantees the state that the merchant will pay his sales taxes on time and in full.

Financing by Surety

Financing by Surety occurs when the Surety provides direct or indirect financial assistance to the principal in the hope that the obligations secured by the performance bond will be completed by the principal.

Fixed Assets to Net Worth

A ratio that indirectly measures liquidity showing what part of permanent assets are covered by permanent capital.

Flow Down Provisions

A Flow Down Provision in a contract incorporates the terms of the general contract between the owner and the general contractor into the lower tier agreement.

Follow the Fortunes

Follow the Fortunes is a phrase referring to a provision found in some reinsurance contracts stipulating that once a risk has been ceded, the reinsurer is bound by the same fate as the ceding company for that risk.

Forfeiture Bond

A Forfeiture Bond is a type of bond that upon default of the Principal (breach of the condition of the bond) calls for the full amount of the bond (the bond penalty) to be paid to the Obligee on demand.

Friend of the Project

Friend of the Project is a term coined by the American College of Construction Lawyers to describe a dispute avoidance and resolution process wherein a project advocate or friend of the project represents the project itself and not any of the contracting parties.


Fronting is an arrangement where the ceding company retains a very small part of a risk and reinsures the large majority of it with one or more reinsurers.

Funds Control

Funds Control is a method of taking control of contract funds to ensure subcontractors and suppliers will be paid appropriately and that contract proceeds remain dedicated to the bonded contract..

General Agreement of Indemnity

See, General Indemnity Agreement.

General Conditions

General Conditions or Contract Provisions are the written portion of the contract documents set forth by the owner stipulating the contractor’s minimum acceptable performance requirements including the rights, responsibilities and relationships of the parties involved in the performance of the contract.

Project overhead/labour general conditions are field-related tasks required to execute a contract such as: Labour supervision, temporary facilities, including trailers, portable toilets and temporary plants, personal protective equipment, travel and per diem, permits, sales and labour taxes, insurance and bonds. General condition costs can be estimated as a percentage of direct project cost. General condition cost percentages tend to be higher for small projects and smaller for large projects.

General Indemnity Agreement

A General Indemnity Agreement is when the Principal and individual indemnitors agree to make a reimbursement to the Surety for any loss the Surety may incur under the bond. These agreements usually contain provisions allowing the Surety certain controls over disputes and access to information and collateral. The agreement usually contains a grant of a security interest in addition to the equitable rights the Surety may already have in job receivables, equipment, work in process, etc. These agreements are to a Surety what loan agreements, security agreements, personal guaranties, and financing statements are to a banker.

General Partner

A general partner is liable for all of their partnership’s debts.

Guaranty Fund

A Guarantee Fund is a fund, derived from assessments against solvent insurance companies, to absorb losses of claimants against insolvent insurance companies.

Hard Market

The Hard Market is the part of the insurance sales cycle where pricing increases and cut rate pricing is at a minimum as companies charge the premiums necessary to meet their underwriting losses in order to avoid insolvency and boost capacity; usually associated with a sharp decline in capacity. See also Soft market.

High-Low Arbitration

High-Low Arbitration is when the parties agree privately, without informing the arbitrator, that the arbitrator's final award will be adjusted to a bounded range. Example: ABC Co. feels $200,000 is owed. XYZ Co is willing to pay $70,000. Their high-low agreement would provide that if the award is below $70,000, XYZ Co will pay at least $70,000; if the award exceeds $200,000, the payment will be reduced to $200,000. If the award is within the range, the parties are bound by the figure in the award.

Hold Harmless Agreement

An agreement to pay certain claims, or to Hold Harmless, that might come up against another person.

Implied Contract

An Implied Contract is a contract with existence and terms determined by the actions of the persons involved, not by their words.

Implied Warranty

An Implied Warranty is an unstated promise, imposed on a seller, that what is sold is fit for normal use, or, if the merchant knows what the buyer wants the thing for, that it is fit for that particular purpose. Unless these implied warranties are expressly excluded (for example, by clearly labeling the thing sold "as is"), a seller will be held to them.

Impossibility of Performance

Impossibility of Performance is a clause within a contract, in which the performance depends on the continued existence of a given person or thing. An implied condition is that the perishing of the person or thing shall excuse performance. Performance is not excused merely because of unforeseen expenses.

Incentive Clause

An Incentive Clause is a contractual provision which provides payments beyond the stated amount in the contract if completion is ahead of schedule or if other objectives are reached which may involve cost savings, safety, quality or absence of disputes.

Indefinite Delivery Contract

There are three types of indefinite-delivery contracts; definite quantity contracts, indefinite quantity, and replacements contracts. (i) A definite quantity contract provides for delivery of a definite quantity of supplies or services for a fixed period, with deliveries to be scheduled at designated locations upon order. (ii) An indefinite quantity contract provides for an indefinite quantity, within stated limits, of specific supplies or services to be furnished during a fixed period with deliveries to be scheduled by placing orders with the contractor. (iii) A requirements contract provides for filling all purchase requirements of designated government activities for supplies or services during a specified contract period, with deliveries to be scheduled by placing orders with the contractor.


To Indemnify is to save another harmless from loss or damage, such as a contractor agreeing to indemnify an owner against a loss.


An Indemnitor enters into an agreement with a Surety to hold the Surety harmless from loss incurred as a result of issuing a contract bond to an applicant who falls short of acceptability. If the principal defaults, the indemnitor, rather than the Surety, assumes the obligation.

Indemnity Clause

There are typically three parts to an Indemnity Clause. One party agrees to (1) indemnify, (2) defend, and (3) hold harmless the other party. By “indemnifying” the first party is agreeing to reimburse the second party for its losses after those losses have been determined by litigation, arbitration, or settlement. By “defending,” the first party is agreeing to pay for the second party’s legal expenses as it defends the claim brought by some third party. By agreeing to “hold harmless” the second party, the first party agrees to protect the second party against harm from suits by third parties. Indemnity clauses fall into three groupings. These are commonly called “broad form,” “intermediate form,” and “narrow form.”

Independent Contractor

An Independent Contractor is one who is contracted to perform certain functions or deliver goods by his own methods and without being subject to the control of another party, subject to delivering on time and on budget.

Indirect or “Backdoor” Financing

Indirectly financing a principal in a near default situation is sometimes called “backdoor financing.” Indirect financing may take the form of direct payments to the principal’s creditors to help get current on delinquent obligations, providing additional bonds to the principal, or loan guarantees at the bank.

Individual Bond

An individual Bond is a bond written in the name of a single public employee.

Intermediate Form Indemnity

See, Indemnity Clauses

Irrevocable Letter of Credit

Irrevocable Letters of Credits may not be modified or cancelled by the customer. The customer's issuing bank must follow through with payment to the seller so long as the drawer complies with the conditions listed in the letter of credit. If the Letter of Credit does not mention whether it is revocable or irrevocable, it automatically defaults to irrevocable. See also, Letters of Credit.

Job Order Contracting

Job Order Contracting is a construction delivery method for the minor repair, rehabilitation, or construction of a project when the work is of a recurring nature but the delivery times, type, and quantities of work required are indefinite.

Joint and Several Liability

Joint and Several is the liability of more than one person for which each person may be sued for the entire amount of damage done or owed by all.

Joint Control

Joint Control is the handling of project funds by both the Surety and the principal. Funds are held in a joint account, and disbursements made only with both signatures so the Surety can assure itself that the affairs of the project are being handled properly.

Joint Venture

A Joint Venture is the grouping together of two or more persons in a business. If they have a continuing relationship, it may become a partnership.


The Jurat is the part of an affidavit where the officer certifies that the same was "sworn" before them. The Jurat is usually in the following form: 'Sworn and subscribed before me, on the ___ day of ___, 2010, (signature of Notary Public)'

Labour & Material Payment Bond

See, Payment Bond

Large, Complex Construction Case Procedures (A.A.A.)

The AAA Procedures for Large, Complex Construction Disputes are designed for cases involving claims of at least $1 million.

Large Deductible Plan

A Large Deductible Plan is an insurance bond where the insurer pays all losses, including those in the deductable. The insurer obtains reimbursement from the policy holder on a quarterly (or monthly) basis. The bond protects the insurer, should the policyholder fail to make their payments.

Letter of Credit

A Letter of Credit used to guarantee a contractor's performance is a "standby" letter of credit in which a bank commits to pay over the amount of the letter to the owner of the project (obligee) in the event of default. A letter of credit differs significantly from a surety bond and one is not a substitute for the other. The Miller Act which applies to federal construction recognizes this and does not permit the use of a letter of credit to guarantee performance of such contracts.

Letter of Intent

A Letter of Intent may be signed during the course of negotiating a construction contract or subcontract, as the parties may wish to begin performance before there has been final agreement. A Letter of Intent is often issued as a directive to commence work with an agreement to pay for that work if a final agreement is not reached.

Liability Insurance

Liability Insurance covers the policyholder's legal liability resulting from injuries to other persons or damage to their property.

License & Permit Bond

License and Permit Bonds are bonds which are required to obtain a license or permit in any city, county or state /province. These bonds guarantee whatever the regulation requires and may be required for payment of certain taxes and fees and providing consumer protection as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.


A Lien is a property right which remains attached to an object that has been sold, but not totally paid for, until complete payment has been made.

Lien Release

A Lien Release is a written document from the contractor to the owner that releases the Lien, Mechanic’s or Material following its satisfaction.

Lien Release Bond

A Lien Release Bond releases a recorded mechanic’s lien.

Lien Waiver

A Lien Waiver is a document from a contractor, subcontractor, material supplier or other construction professional(s), having lien rights against an owner’s property, relinquishes all or part of those rights. Lien waivers are generally used for processing progress payments to prime or main or subcontractors as follows: Conditional Lien Waiver, Unconditional Lien Waiver, and Final Lien Waiver

Limited Liability Corporation, (L.L.C.)

An LLC is a US term and is a hybrid between a partnership and a Corporation in that it combines the "pass-through" treatment of a partnership with the limited liability accorded to corporate shareholders. LLC members are not personally liable for the LLC's debts and obligations. The LLC limited liability umbrella does not, however, protect members from every type of liability ie. they are personally liable for their own negligence.

Limited Partner

A Limited Partner is an owner who is liable only up to the amount of money they invested.

Limited Partnership

A Limited Partnership has two kinds of partners: 1) limited partners, who provide financial backing and have little role in management and no personal liability, and 2) general partners, who are responsible for managing the entity and have unlimited personal liability for its debts.

Line of Credit

Lines of Credit are offered by financial institutions to some of their customers, allowing them to borrow up to a certain amount based on their credit rating or collateral provided. Ie. Their home.

Liquidated Damages

Liquidated damages, in a construction context, are damages specified in a contract to be paid in the event of an unexcused delay. Liquidated damage clauses, to be enforceable, must penalize, but be a reasonable approximation of the probable loss that will be caused by delayed performance. An additional requirement is that the actual damages caused by delay are difficult or impossible to determine.

Look See Money

Look See Money is money spent by the Surety to finance the principal while the Surety is investigating a default or potential default and analyzing its options.

Loss Expense-Unallocated

Unallocated Loss Expenses are salaries and other expenses incurred in connection with the operation of a claim department of an insurance carrier which cannot be charged to individual claims

Loss Expense-Allocated

Allocated Loss Expenses are handling expenses, such as legal or independent adjuster fees, paid by an insurance company in settling a claim which can be charged to a particular claim.

Loss Ratio

A Loss Ratio is a fraction calculated by dividing the amount of surety losses by the amount of surety premiums, expressed as a percentage of the premiums. Various bases are used in calculating the loss ratio

Lump Sum Agreement

Please see Stipulated Sum Contract.

Maintenance Bond

Maintenance Bonds provide for the upkeep of the project for a specified period of time after completion (2 year is typical) and guarantee against defective workmanship or materials. These bonds may occasionally include a guarantee of "efficient or successful operation" or other obligations.

Manual Rate

Manual Rate is the premium rate developed for a group's insurance coverage from the company's standard rate tables normally referred to as its rate manual or underwriting manual.

Material Man

A Material Man, or supplier, provides building materials for a construction or repair project.

Measured Mile Analysis

A Measured Mile Analysis compares the productivity of a period that has been impacted by a negative condition or event VS. the productivity of similar work under normal, un-impacted conditions. The theory is that the difference between a contractor’s actual inefficient productivity and an identified normal productivity, is the amount of excess cost to the contractor.

Mechanic’s Lien

A Mechanic’s Lien is a legal claim placed on real estate by someone who is owed money for labour, services or supplies contributed to the property for the purpose of improving it. Typical lien claimants are general contractors, subcontractors and suppliers of building materials. A mechanics' lien claimant can sue to have the real estate sold at auction and recover the debt from the proceeds. Property with a lien on it cannot be easily sold until the lien is satisfied; therefore, owners have a great incentive to pay their bills.


Mediation involves the appointment of a mediator who acts as a facilitator assisting the parties in communicating and negotiating a settlement. The mediator does not adjudicate the issues in dispute and cannot force a compromise; only the parties, of their own volition, can shift their position in order to achieve a settlement. The result of a successful mediation is called a "settlement." Compare with arbitration.

Mediator’s Proposal

At the point of impasse, a Mediator Proposal will be made by the mediator, to settle the case. The proposal would be presented confidentially to each side and only the mediator would know whether it has been accepted by all parties.

Miller Act

The Miller Act is a 1935 statute mandating surety bonds on all federal (USA) public works contracts in excess of $100,000. State and local public works projects are protected by "Little Miller Acts."


A Mini-trial is an ADR procedure wherein a retired or sitting judge hears an abbreviated presentation of the evidence and renders a non-binding judgment on liability, damages, or both.


A Minor is a person who has not reached the legal age of majority. The age of majority varies from province to province and from state to state and ranges from 18-21.

Miscellaneous Bonds

Miscellaneous Bonds are a term used to refer to bonds which do not fit any of the other well-recognized categories of surety bonds.

Mitigation of Damages

Mitigation Damages involves the person who suing another for damages; they has a responsibility to minimize those damages, as best possible. For example, in a wrongful dismissal suit, the person that was fired should make some effort to find another job to minimize the economic damage on themselves

Modified Total Cost Method

The Modified Total Cost Method involves proving damages that focuses on the impacted work activities and adjusts the original estimate to remove mistakes, inaccuracies, and work items not affected.

Name Schedule Bond

A Name Schedule Bond is a fidelity bond which insures an employer for loss caused by the dishonest act of individually named employees. A specific amount of coverage is also listed for each individual.

Name Schedule Public Official Bond

A Name Schedule Public Official Bond is specifically for public officials. Examples are; city council members, school board officials.

Narrow Form Indemnity

See Indemnity Clauses


National Association of Surety Bond Producers, , is an organization of over 500 independent insurance agencies and brokerage firms that specialize in providing surety bonding and insurance programs to construction contractors. Most NASBP member firms also offer expertise in commercial and miscellaneous surety bonding as well. NASBP is committed to strengthen professionalism, expertise and innovation in the surety industry and to advocate its use worldwide.


Negligence is the intentional harm as individual causes and/or their failure to act as a reasonable person would be expected to act in similar circumstances. Negligence, if it causes injury to another, can give rise to liability under tort. We all have a duty of care to ensure that our actions do not cause harm to others. Gross negligence is any action or an omission in reckless disregard of the consequences to the safety or property of another. See also contributory negligence and comparative negligence


Negotiation is the process where parties directly exchange ideas, views, promises, and problems surrounding a dispute.

Net Quick Assets

Net Quick Assets are the difference between allowable current assets and changeable current liabilities. This figure is referred to as the working capital. A contractor must have adequate working capital in order to qualify for a bond.

Net Worth

Net Worth is the amount by which assets exceed liabilities. Bond indemnifiers utilize Net Worth in adjudication the size of a job a contractor can handle.

No Damage for Delay Clause

No Damage for Delay Clause is a contract clause that stipulates that, in the event of a delay, the delayed party will be compensated only with an extension of time, but no monetary compensation.

Non-admitted Insurance Company

A Non-Admitted Insurance company is not licensed to do business in a particular state; such a company may sell excess and surplus insurance in the state if admitted insurers decline to write a risk.

Notary Public

A Notary Public is a public officer with authority to certify signatures and statements, usually in connection with the transfer of real and personal property or agreements.

Notary Public Bonds

A Notary Public Bond is a bond required to protect against losses from improper actions of a notary public.


In the Surety context, the Obligee is the person or entity to whom the principal (contactor) and the Surety Company owe their obligations. Obligee is also the person who is to receive the benefit of someone else's obligation.


See, Principal. In the Surety context, the obligor is the party primarily bound by the obligation – the contractor.

Occurrence Policy

An Occurrence Policy is a liability insurance policy that covers claims arising out of occurrences that take place during the policy period, regardless of when the claim is filed.


Offset is a deduction; a counterclaim; a contrary claim by which a given claim may be reduced or cancelled.

Open Penalty

Having a bond with Open Penalty, means that the bond does not have a maximum pay-out dictated, thus the liability of the surety is thus unlimited.


Ordinance is a public regulation; i.e. a city ordinance

Overpayment Defence

Overpayment Defence alleges the improper payment of contract funds by the obligee. Although proper and timely payment to the contractor one of the obliges primary obligations, it is a defense which rarely allows the surety to obtain a full discharge but which often allows the surety to reduce pro tanto the cost of its performance obligation.


Panel is a list of persons, arbitrators, neutrals or judges selected to decide a specific case


Partnering is a dispute avoidance technique that attempts to establish a working relationship among all parties based on cooperation and achievement of mutual goals and objectives. Partnering is a concept that every contract has an implied covenant of good faith and fair dealing, and through the exercise of that agreement, the construction project stakeholders strive to create a synergy of purpose to solve problems for the good of the project.


A partnership is a business organization in which two or more persons carry on a business together. Partners are each liable for all the debts of the enterprise but they also share the profits exclusively.

Pay If Paid Clause

See, Contingent Payment Clause.

Pay When Paid Clause

The Pay When Paid Clause is used by General contractors in an attempt to avoid the cash flow problems that can arise when they're forced to pay subcontractors before receiving payment from the owner. Under such a clause, the subcontractor also agrees not to be paid for their work until the contractor is paid by the owner. If the owner does not pay, however, this does not preclude the general from paying the subs; contrast:"pay-if-paid clause."

Payment Bond

A Payment Bond assures payment of a contractor’s obligations to its subcontractor’s and suppliers. Payment bonds are required on public works projects and are often required on private projects.

Penal Sum

The Penal Sum is the face amount of a performance or payment bond, usually an amount equal to the amount of the underlying contract. If there are separate performance and payment bonds, there are two penal sums available. The Penal Sum is the maximum amount the Surety would be required to pay in the event of a default. Also called the bond “penalty”.


The Penalty is the monetary obligation of a bond.


A Pension is the compensation received on a regular basis by an employee, from an employer, upon retirement.

Performance Bond

A Performance Bond is issued by the Surety and assures the obligee on the bond that if the contractor defaults in the performance of the underlying contract, the Surety company will complete the contract itself, arrange for a contractor to complete the contract for the obligee, or respond in damages not to exceed the penal sum of the bond. In the event a new contractor is selected to complete the work, the Surety will pay, or place the obligee in funds to pay, the new contractor the amount required to finish the work, minus the unpaid amount under the original contract. The Surety is not obligated to pay more than the penal sum or limit of liability stated in the bond. Bonds vary in coverage and limitation by their terms. Some bonds are statutorily required on public projects.

Performance Specifications

Performance Specification are written material containing the minimum acceptable standards and actions, that are necessary to complete a project, including aesthetic values.

Personal Indemnification

Personal Indemnification binds the principal's personal commitment to the business entity and to the Surety. If the principal is a closely held corporation or partnership, the individual owners and/or their spouses may be asked to personally indemnify the bond.

Personal Surety

A person who acts as Surety for another, who may or may not charge a fee for his or her guarantee. Personal Sureties are generally not subject to licensing requirements like corporate sureties, but may be subject to some minimum regulation.


A Plaintiff is the person or business that files the action or suit in a court of law.

Plaintiff Bond

A Plaintiff Bond is a bond that guarantees payment of damages if a law suit is decided in favour of the defendant.

Position Schedule Bond

A Position Schedule Bond is a Fidelity Bond which insures an employer for loss caused by the dishonest act of employees. The employees are listed, with specific amounts of coverage for each position. Position Schedule Bonds are particularly useful in cases where a company or position has a high turnover rate.

Power of Attorney

Power of Attorney is an instrument authorizing another to act as one's agent or on one's behalf.

Preconstruction Services

Preconstruction Services are a range of activities performed by a contractor prior to construction, including value engineering, constructability, cost and schedule studies, and staffing requirements.

Pre-dispute ADR Contract Clause

A Pre-dispute ADR Contract Clause is a clause included in the parties' business agreement to specify a method for resolving disputes that may arise under that agreement. It may refer to one or more ADR techniques, even naming the third party that will serve as an arbitrator or mediator in the case

Preferred Stock

Preferred Stock is paid its dividends prior to common stockholders. If the company folds, preferred stock also have access to the assets, prior to common stockholders, however, often the stock does not have voting rights.

Preferred Surety Bond Program

The Preferred Surety Bond Program provides incentives to underwriters to provide surety coverage for small, minority-owned and woman-owned contractors.


Prequalification is the rigorous review, performed by the Surety, to certify that a contractor is capable of performing the work in accordance with the terms and conditions of the contract.

Pre-qualification of prospective bidders

Pre-qualification of prospective bidders is a screening process wherein the owner or his/her appointed representative gathers background information from a contractor or construction professional for selection purposes. Qualifying considerations include competence, integrity, dependability, responsiveness, bonding rate, bonding capacity, work on hand, similar project experience, and other specific owner requirements.


The Premium is the amount paid for an insurance policy or bond.


A Principal, in the context of surety, is the person or entity which has undertaken the primary obligation - the contractor on a construction contract.


Privity of contract exists between the parties who took part in making the deal. These persons have special rights and duties because of their privity, including the right to enforce the contract.

Pro Forma Income Statement

A Pro Forma Income Statement is a financial statement of revenue and expenses that includes hypothetical numbers, based on a takeover, for example.


A Producer is a term commonly used to reference an agent, solicitor or other person who sells insurance or bonds, producing business for the company and commissions.

Professional Liability Insurance

Professional Liability Insurance is the same as Errors & Omissions Insurance.

Project Neutral

See, Standing Neutral

Promissory Estoppel

Promissory Estoppel is the legal principle that applies when Person A makes a promise and expects Person B to do something in reliance upon that promise, then Person B does act in reliance upon that promise, the law will usually help Person B enforce the promise because Person B has relied upon the promise to his or her detriment. Person A is "estopped" from breaking the promise even when there is no consideration to make the promise binding as part of a contract.

Prompt Payment Act

Prompt Payment Act is a law enacted in order to ensure that companies transacting construction business with the Government are paid in a timely manner.

Property Insurance

Property Insurance provides financial protection against the loss of, or damage to, real and personal property caused by such perils as fire, theft, windstorm, hail, explosion, riot, aircraft, motor vehicles, vandalism, malicious mischief, riot and civil commotion, and smoke.

Proportional (Pro Rata) Reinsurance

Proportional (Pro Rata) Reinsurance is a form of reinsurance which obligates the ceding company cede the reinsurer automatically and to accept a share of risk in accordance with a “treaty” agreement. There are two main types of agreement; “surplus” and “quota share.” Under a Surplus Liability Treaty, the reinsurer accepts only the surplus liability in excess of a predetermined limit and the reinsurer’s loss participation in the entire loss is in proportion to its share of the total coverage limit. Under a Quota Share Treaty, the primary company cedes and the reinsurer assumes a fixed percentage of every risk in the class of business defined in the treaty.

Public Official

A Public Official is someone who holds a public office. For example; a mayor or school board official.

Public Official Bond

A Public Official Bond is one that protects against the dishonesty or inaction by a public official.

Punitive Damages

Punitive Damages are exceptional damages ordered by a court against a defendant where the act or omission which caused the suit, was of a particularly heinous, malicious or highhanded nature. Punitive damages are to punish, not merely to compensate. The exact threshold of punitive damages varies from jurisdiction to jurisdiction.

Quia Timet

A Quia Timet is an action filed by a Surety to protect its interests, prior to an actual default. A Quia Timet differs from an injunction, which corrects past and present - or imminent and certain – injuries.


The price per $1,000 of insurance for surety coverage, usually in one year, expressed in dollars and cents.

Ratification Agreement

A Ratification Agreement is commenced when the Surety must take over the project. The Surety will negotiate agreements with the subcontractors and suppliers to the bonded principal, offering prompt payment in return for a commitment to continue performance at the prices originally offered to the principal.

Reclamation Bond

A Reclamation Bond insures that an entity will restore land which it has mined or altered, to its original condition.


Reinsurance is the acceptance by one insurer (the reinsurer) to accept all or part of the risk or loss underwritten by another insurer (the ceding insurer).


A release is a document by which a claim or right is relinquished, generally in exchange for making final payment to a contractor.


A Replevin is the legal action undertaken for the recovery of personal property wrongfully taken or detained.

Replevin Bond

A Replevin Bond is a bond given by a plaintiff in a replevin law suit. It will cover losses to the defendant in the event that the plaintiff fails to win the case.


A Retainer are funds that are earned by the contractor but not paid until some agreed upon date, such as the completion of the job. Retainers in construction are usually 5% to 10% of the contract amount are retained mainly as an incentive to complete the job in a timely.

Retrospective Plan Bond

A Retrospective Plan Bond is an insurance program bond which has a final premium payment based on any incurred losses and accompanying fees.

Retrospective Rating

Retrospective Rating is a procedure which allows adjustment of an insured's final rate on the basis of the insured's own loss experience.

Return on Net Worth

Return on Net Worth is a financial ratio that measures the profit return on the investment , the reward for the assumption of ownership risk.

Sales to Working Capital

Sales to Working Capital is a ratio of annual revenue to working capital that measures to what extent the company's sales volume is supported by the working capital.


Salvage is the property which the insurance company secures ownership in, as a result of paying a claim for total loss or damage on the item, based on the true value of the property in its undamaged state or before the loss occurred.

Savings Clause

A Savings Clause in a dual obligee rider, requires the additional named obligee to fulfill the contractual obligations of the contract in order to invoke the performance features of the bond.


SBA is a U.S. acronym for the Small Business Administration. The SBA has a program to help small and minority owned contracting businesses obtain surety bonds.

Self-Insurer Retention Plan Bond

A Self-Insurer Retention Plan Bond is one used for Workers' Compensation, general liability and other coverage where limited coverage is available.

Scope of Authority, Agent’s

Agent’s Scope of Authority is the performance of duties which were expressly or impliedly assigned to the agent by the principal.

Settlement Agreement

Settlement Agreement in a civil lawsuit is the document that spells out the terms of an out-of-court compromise.

Severability Clause

A Severability Clause is a provision that keeps the remaining provisions of a contract or statute in force if any portion of that contract or statute is declared void or unconstitutional.

Shareholder Agreement

A Shareholder Agreement is a contract between the shareholders of the company and the company itself, outlining things such as control inflows to the company (purchase of shares), how profits are to be distributed, dispute resolution and what to do if a shareholder dies.

Silent Joint Venture

A Silent Joint Venture involves an undisclosed venture partner.

Silent Partner

A Silent Partner is a person who invests in a company or partnership but does not take part in administering or directing the organization; he or she just shares in the profits or losses.

Soft Costs

Soft Costs generally include architectural and engineering, legal, permits and fees, financing fees, construction, interest and operating expenses, leasing and real estate commissions, advertising and promotion, and supervision, all in addition to the direct Construction Cost.

Soft Market

A Soft Market is the part of the insurance sales cycle when competition is at a maximum as insurance companies use their excess capacity to sell more policies at lower prices. See also Hard Market.

Spearin Doctrine

The Spearin Doctrine, arose from the case of United States v. Spearin, 248 U.S. 132 (1918), and maintains that a contractor will not be liable to the owner for loss or damage which results solely from insufficiencies or defects in such information, plans and specifications.

Standing Neutral

A Standing Neutral provides ongoing dispute prevention services, reviews and assesses disputes, conducts neutral fact-finding and efficiently and economically guides the parties through the resolution process.

Status Inquiry Letter

Most Surety Companies routinely send out job or project Status Inquiry Letters to obligees to monitor the progress of the contracts they have bonded. It is not practical to visit all bonded jobs on a regular basis, and most of the time, the responses to these inquiries report satisfactory performance. When a Surety is notified of a problem early on, it may be in a position to help the subcontractor and prevent the problem from becoming a major disaster. Principals may be reluctant to inform the Surety about a problem for fear of that knowledge resulting in a curtailment of their surety credit. Thus, the job status inquiry gives the obligee a reasonable means of communicating with a principal’s Surety. Principals should keep in mind that the obligee has a right, and in some cases, a duty, to communicate with the Surety about unsatisfactory performance.

Statute of Limitations

Statute of Limitations is a law that sets a maximum amount of time after something happens for it to be taken to court, such as a "four-year statute" for lawsuits based on a contract, or a "one-year statute" for a claim on a payment bond claim. These statutes vary from state to state and province to province.

Statute of Repose

A Statute of Repose of Completion is a date, typically running from the date of completion of a project, after which parties involved in a construction project would have no further liability. Statues of Repose arose to deal with the difficulties in determining when a cause of action arose, and was therefore barred by a statute of limitations, because of discovery of defects many years after project completion.

Step or Multi-Step Dispute Resolution

Step or Multi-Step Dispute Resolution is a method that the parties to a contract may agree to partake in if either a specific dispute arises. One step typically is some form of negotiation, preferably face-to-face between the parties. If unsuccessful, a second tier of negotiation between higher levels of executives may resolve the matter. The next step may be mediation or another facilitated settlement effort. If no resolution has been reached at any of the earlier stages, the agreement can provide for a binding resolution through arbitration, private adjudication or litigation.

Stipulated Sum Contract

Stipulated Sum Contract is in agreement whereby a specific amount is set as the total payment for performance of the contract. See, lump sum contract.

Stop Loss (excess of loss ratio)

Stop Loss reinsurances are used by individual members to obtain a measure of protection against an overall underwriting loss on any one year of account.

Subcontract Bond

A Subcontract bond is required by a General Contractor of a Subcontractor, guaranteeing that the subcontractor will fully perform the subcontract in accordance with the terms and will pay for certain labour and material incurred in the subcontracted work.

Subcontractor Default Insurance

See, Contractor Default Insurance

Subdivision Bond

A Subdivision bond is required by a city, county or state to guarantee the principal will finance and construct certain improvements such as streets, sidewalks, curbs, gutters, sewer, lift stations, and drainage systems.


Subrogation is the right of a surety, in its name or in the name of the obligee under a bond, to pursue a course of action against the principal or any other party liable for a loss paid by the Surety.

Substantial Completion

Substantial Completion, unless a contract provides for a different definition, is generally understood to occur when a project is sufficiently complete, and space usable, despite some work still needing to be done.

Summary Judgment

A Summary Judgement is the final decision , made by a judge, resolving a lawsuit in favour of one of the parties. A motion for summary judgment is made after discovery is completed but before the case goes to trial. The party making the motion marshals all the evidence in its favour, compares it to the other parties's evidence, and argues that a reasonable jury looking at the same evidence could only decide the case one way--for the moving party. If the judge agrees, then a trial would be unnecessary and the judge enters judgment for the moving party.

Summary Jury Trial

A Summary Jury Trial is an ADR procedure wherein each side puts on an abbreviated summary of its case to six jurors selected from the jury roster. The jurors do not know and are not told that their verdict on liability and damages is purely advisory. The premise behind this ADR method is that the parties get a glimpse of what a jury might do in their case.

Supplementary Conditions

Supplementary Conditions are a written section of the contract documents, supplementing and qualifying or modifying the contracts general conditions.

Supply Bond

Supply Bonds guarantee performance of a contract to furnish supplies or materials. In the event of a default by the supplier, the Surety indemnifies the purchaser of the supplies against the resulting loss.


A Surety, or the Surety Company, is a properly licensed firm or corporation willing to execute a surety bond, or bonds, payable to the owner, securing the performance on a contract either in whole or in part; or securing payment for labour and materials.

Surety Association of America

The Surety Association of America (SAA) is a voluntary, non-profit, unincorporated association of companies engaged in the business of suretyship.

Surety Bond

A Surety Bond is a three party agreement between a contractor (Principal), the project owner (Obligee), and the surety company. The bond insures that the contracted work will be completed on time and on budget, if not, the bond will cover any losses incurred by poor contract performance.

Surety Credit

Contractors qualify for Surety Credit following an analysis of their financial statements, integrity and abilities by the surety underwriter. The line of Surety Credit is usually stated in terms of largest single job that the surety will underwrite and the total work program (bonded and un-bonded) that the Surety will support.

Surety Information Office

The Surety Information Office (SIO) is the information source on surety bonds.

Surety Support Programs

A Surety Support or Mentor Program offers program participants, usually small and disadvantaged businesses, the ability to complete projects as a better, more sophisticated firm, capable of tackling larger projects in the future and establishing a credit track record.

Surety Underwriter

A Surety Underwriter is an employee of the surety company who evaluates applications for surety bonds and determines the terms under which the applicant will be bonded.

Surplus Lines

Surplus Lines is coverage bond by an unlicensed or non-admitted insurance company because of the coverages unavailability in the licensed and admitted market.

Sworn Statement

A Sworn Statement is one given under oath; an affidavit.

Takeover by Surety

Takeover by Surety occurs whenever a surety, upon default of its principal, enters into an agreement, or by its conduct agrees to "take over" the remaining performance obligations of its principal. Similar to selection of the financing option, the Surety contemplating a takeover of the bonded work is confronted with a number of concerns: (1) preservation of bond penalty ; (2) preservation of indemnity rights in the face of its principal's protestations concerning the costs being incurred to complete the work; (3) dealing with uncooperative owners and vendors to its principal; (4) holding down the continuing expense of administering completion; (5) the pressing time constraints of delay damage assertions; and (6) the timely collection of the available contract funds and retainages. The principal advantage afforded by the takeover option is the control afforded to the Surety over its potential loss. Presumably, the Surety will select a replacement contractor(s) with greater present capabilities than the principal. Further, to the extent the replacement contractor undertakes the obligations of the bonded contract, for a fixed price, the Surety is able to fix its loss.

Tender Option

When a default termination occurs at an early stage of the project, the Surety may consider tendering a sum of money to the obligee in full and final settlement of all claims.


Terminating a contract is usually the result of the default of one of the parties.

Termination for Convenience

Termination for Convenience is usually pursuant to a contract clause or by agreement of the parties after the execution of a contract, which is not for cause or default, but for the convenience of one of the parties. When a contract is terminated for convenience, the contractor is usually paid for the value of the work performed and some portion of his earned or anticipated profit and overhead.

Three C's

The Three C’s refer to underwriting accepting of: Character, Capacity, and Capital. Character: applicant's standing, reputation and trustworthiness. Capacity: the applicant should possess those necessary skills and ability to perform the contract; and Capital: must possess the financial resources necessary to complete the job.

Time is of the Essence

Time is of the Essence, is a phrase used in a contract to make timeliness of performing a contractual promise material, thus making a failure to do what is required by the time specified a breach of the contract.

Total Cost Method

Total Cost Method is a method by which a contractor seeks to prove its damages by comparing the costs of performance with what the contractor contends should have been the cost of the project. Compare to Modified Total Cost Method

Treasury List

The Department of the Treasury maintains a list of corporate sureties approved to issue bonds for U.S. federal projects, Treasury Department Circular 570.


A Trustee is a person or entity, appointed to manage the affairs of a company, or institution.

Unit Price Contract

Unit Price Contracts provides the owner pay the contractor a specified amount of money for each unit of work completed in the performance of a contract. Usually, this is used in situations where precise quantities cannot be predetermined.

Value Engineering

Value Engineering is a design review process involving critical evaluation of elements of a building to determine the relative value to the owner of the specified product or system compared to alternative products or systems. Life-cycle costing and constructability studies may be parts of the value engineering process.


A waiver is when a person disclaims or renounces to a right that they may have otherwise had. Waivers are not always in writing. Sometimes a person's actions can be interpreted as a waiver.


A Warranty is an undertaking or stipulation that certain facts are as stated.

Workers' Compensation Insurance

Workers’ Compensation Insurance is an insurance expense, collected by the Federal Government, covering employees that are injured on the job, and to pay benefits to dependents of employees killed in the course of or arising out of their employment.

Workers' Compensation Self-Insurer Bond

A Workers' Compensation Self-Insurer Bond guarantees that an employer will compensate an employee injured on the job. Employers have the choice to post a workers' compensation bond instead of purchasing workers' compensation insurance. This practice can be risky due time an injury takes to come to light, also known as 'Long-tail' liability.

Last Surety on-Bond Form - The surety is responsible for ALL workers' compensation claims. The surety is released from liability when the bond is cancelled or replaced.

Traditional Bond Form - The surety is liable for payment of any workers' compensation claims that occur during the time the bond is in force, even after the policy has been cancelled.

Work-On-Hand Report

A Work-On-Hand Report is a financial statement or schedule which lists a contractor's jobs in progress.

Wrap Up Insurance

Wrap Up Insurance is one policy that covers all exposures on a project, usually purchased by the owner and common to larger projects.

X, C and U Exclusions

X,C and U exclusions deny payment for loss due to Explosion ("X"), Collapse ("C") or Underground Damage ("U") Exclusions to property liability forms aimed principally at contractors and excavators. Explosion includes property damage arising from blasting or explosion. Collapse includes structural property damage and property damage to any other property rising out of grading of land, excavating, burrowing, filling or backfilling, tunnelling, pile driving, or coffer dam or caisson work, or moving, shoring, underpinning, razing or demolishing any building or structure. Underground damage, “C”, includes damage to wires, conduits, pipes, mains, sewers, tanks, tunnels, or any similar property beneath the surface of the ground or water caused by and occurring during the use of mechanical equipment for the purpose of grading land, paving, excavating, drilling, burrowing, filling, backfilling, or pile driving.

Z Score

Z Score is a company failure prediction method developed by Professor Edward Altman of New York University. A company's Z score is a positive function of five factors: (net working capital) / (total assets) (retained earnings) / (total assets) (EBIT) / (total assets) (market value of common and preferred) / (book value of debt) (sales) / (total assets). Although the weightings are not equal, the higher each ratio, the higher the Z score and the lower the probability of bankruptcy.

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