Home

Bonding instead of Load Balancing – High Availability for Business-Critical Processes


What is a Contractor License Surety Bond ?


Practical Advice for Contractors Seeking to Increase Their Bonding Capacity – Part 1

Probate Bonds

What is a Probate Bond?

A probate bond is a specialized type of commercial bond.  This bond guarantees that the executor of an estate (or an administrator in case of an intestate estate) does their duty with regard to the assets of the estate.  So, what happens is that the executor applies to a commercial surety company and gets a bond so that they will not use the money improperly, or otherwise abscond with the funds, and instead will uphold their duties with regard to the estate.

These bonds are not terribly expensive.  Instead, they are very cost sensitive and do not cost too much.  These bonds are what are needed to get many estates taken care of.

Good luck on getting a good probate bond for your probate estate.


Basics of the law surrounding corporate surety bonds

We recently posted about probate bonds, which is a bit outside of our normal legal topic.  However, Our friends from Swiftbonds saw our posts and sent us the article below, which is just too good to pass up.

We promise that our next post will be something easier to understand, like whether a waterfall provision in a securitization document has precedence over a conflict sub-servicing agreement.  Or something like that.  Thanks, FLA.

The Law Surrounding Corporate Surety Bonds

The law of fidelity bonds is certainly not new.  The early 20th century saw a lot of litigation with regard to how surety bonds were interpreted by the court.  This litigation led to a prolonged period of certainty with regard to the underlying rights and liabilities of the parties.  Unfortunately, the recent financial downturn and the resulting pain suffered by construction companies, municipalities and other large institutions have led to a new set of litigation, which has resulted in some changes regarding how these contracts are ultimately viewed by the courts.

Financial Crisis

Theories of Interpretation

Strict Interpretation.  The most theory of construction is that of strict interpretation of the document.  That is, the document says exactly what it say and the court will interpret everything based upon the four corners of the document.    Thus, the intent of the parties are not relevant to any interpretation, but instead only the words on that document rule.  Anything that is not discussed would, therefore, be interpreted based upon state law or the UCC.

Uniform Commercial Code

This theory was the most prevalent in the early days.  However, given that most forms are preprinted forms created by the individual insurance companies (or bankers forms) with little to no negotiation, this rule has been largely overcome by newer rules of construction.  Still, it’s a good rule of thumb to remember that if the document actually specifies something and that something comes to pass, then the document will nearly always rule.

Insurance Contract.  The second major theory of construction is that a surety bond is the equivalent of an insurance contract.  Thus, the interpretation of that document should follow the general rules of construction found within the state regarding other insurance contracts.  This includes a large body of law on pooling and sharing of risk and, therefore, these rules are seen through that viewpoint.

Contract

The large problem with this viewpoint (which is the law in several states) is that fidelity bonds are not written like insurance contracts.  Instead, the underwriting process assumes no risk instead of a pooling effect.  We have fortunately not seen a spiking of rates in the states with these rules, so that is a good thing.

Indemnification.  The last major theory is that a corporate surety bond is basically an indemnification agreement and, therefore, the actual terms of the agreement are less important than the purpose for which it was given.  In these circumstances, the court takes a much more equitable approach in determining the liability.

Ambiguity sign

This is, of course, the most ambiguous of all the theories of construction.  How do you properly draft and structure the risk of an agreement if that contract can be interpreted in a way that is totally different than the words on the page?  The simple truth is, you don’t.  Instead, you create a business model that utilizes standard forms and agreements and then use the law of large numbers to nullify systemic risk.  And this is the world that we live in today.

Conclusion

The 21st century has seen a rebound in litigation with regard to corporate surety bonds.  This litigation has led us to review the old theories of construction on how these contracts are interpreted.  There are three main ways: 1) strict interpretation; 2) using insurance contracts as a guide; and 3) these agreements are similar to indemnification agreements.


An update on probate bonds

Update on Bonds for Court

Our last post was on probate bonds, which led to several questions around the office. So, here are some answers to those questions that we received.

1) Are probate bonds necessary for all cases?

Bonds are required, by statute, in all states for court cases involving probate assets.  However, those requirements can be waived.  The easiest way to get this requirement waived is to have it waived in the Will that is filed with the court.  Further, you can also get the requirement waived if ALL of the beneficiaries agree to waive the requirement.  In most intestate situations, this is the only method available.  If the parties do not get along or if there is one party that is not cooperating, then a bond will have to be filed with the court.  In our experience, about half of all intestate estates will require a probate bond.

2) Are there many bond brokers?

Yes, there are TONS of these guys.  Call your local bar association to find one that is recommended if you cannot find one through the Internet.  Just make sure that these are “bail bond” brokers.

3) What is the cost?

The costs seems to run around $500-1,000 for most estates.  Obviously, large estates are much more expensive.  For most bonds, there is a sliding scale based upon the total amount of the assets within the estate.  The rate on the sliding scale goes down as the amount goes up, but obviously the total cost goes up.
This is why most attorneys recommend to get the bond waived by having a will (or trust).

4) Are all court bonds the same?

Nope.  They are all different.  There are probate bonds (see the article below) as well as other bonds for appellate needs (that is, you lost a case and decided to appeal it) as well as other specialty bonds.

Conclusion

I hope that this helps in understanding some of the ins and outs with regard to probate bonds.  They are necessary, unless you get that requirement waived in the will.  Thanks.