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Why do Surety Bonds Require Collateral?
In a previous post, we explored the topic of defendants bonds and appeal bonds in particular. In upcoming posts we will define in more detail other kinds of defendants bonds. For this post, however, the surety bond experts at Jurisco will be answering the question that many attorneys ask when they are required to procure a defendant bond: Why do Surety Bonds Require Collateral in order to qualify for bond? There are two answers to this question:
The most common answer is that collateral is required when the principle is deemed to be ‘high risk’ such as applicants who have poor credit. The collateral then comes in the form of cash deposited with the bond agency or in the form of an Irrevocable Letter of Credit (ILOC) from a qualified financial institution of long standing. More and more agencies are accepting an ILOC in lieu of cash. A principle can be considered ‘high risk’ for several reasons but, as noted, the most common is a poor credit rating. A poor credit rating can affect principles applying for Probate, Plaintiff and Defendants bonds.
It is important to note that the terms of the collateral release are set by the agency and must be agreed upon by the principal before the bond will be issued. A surety agency will often not release collateral until the obligee releases the surety from any liability; this is done in the form of a written statement. Furthermore, an obligee will often not release liability until it seems clear that there will not be any claims filed against the bond. This can be well after the bond period ends and so a principle must be aware that their collateral may not be released even when the bond expires.
The second most prevalent reason why a principal is required to post collateral is when it is mandatory under the terms of the bond. This is the case with all defendant bonds. As mentioned in a previous post LINK, defendant bonds are used used as good faith measures so certain legal actions can be delayed. The collateral acts as good faith for the surety and without it, issuing an appeal bond or a transfer of lien bond would be far too high risk. For defendants bonds, Jurisco requires full collateral in the amount of the bond, though exceptions can be made for large publicly traded corporations or Insurance companies.
Check back in to the Jurisco article site for more information on collateral and other surety bond requirements. If you have any questions, the surety bond experts at Jurisco will be happy to help.