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Surety and Fidelity Bonds

Practice questions on surety and fidelity bonds for the casualty exam, each with an answer and explanation.

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Study questions and answers

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1. The three parties to a surety bond are the:

  1. Insured, insurer, and beneficiary
  2. Owner, tenant, and lender
  3. Employer, employee, and insurer
  4. Principal, obligee, and surety
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D. Principal, obligee, and surety
The principal promises to perform, the obligee receives the promise, and the surety guarantees the principal's performance.

2. A contractor obtains a performance bond for a city construction project. In this arrangement the city is the:

  1. Principal
  2. Surety
  3. Obligee
  4. Indemnitor
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C. Obligee
The obligee is the party protected by the bond. Here the city is protected if the contractor fails to finish the job.

3. How does a surety bond differ from an insurance policy?

  1. The surety expects losses to occur and prices for them
  2. The surety bond can be cancelled by the obligee at any time
  3. The surety can recover from the principal any amount it pays on the bond
  4. A surety bond has only two parties
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C. The surety can recover from the principal any amount it pays on the bond
Surety is a form of credit. The principal signs an indemnity agreement and must repay the surety for losses paid under the bond.

4. A bond that guarantees a contractor will enter into the contract at its bid price if the bid is accepted is a:

  1. Bid bond
  2. Payment bond
  3. Maintenance bond
  4. License bond
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A. Bid bond
A bid bond guarantees the bidder will sign the contract and provide the required performance and payment bonds if it wins.

5. A bond that guarantees a contractor will pay its subcontractors, laborers, and suppliers is a:

  1. Performance bond
  2. Fiduciary bond
  3. Bid bond
  4. Payment bond
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D. Payment bond
Payment bonds protect those who supply labor and materials, which also protects the owner from liens.

6. Which federal law requires performance and payment bonds on many federal construction contracts?

  1. The Miller Act
  2. The Jones Act
  3. ERISA
  4. The Fair Credit Reporting Act
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A. The Miller Act
The Miller Act requires contractors on qualifying federal construction contracts to post performance and payment bonds.

7. An executor appointed by a court to manage an estate is often required to post which type of bond?

  1. Fiduciary bond
  2. Bid bond
  3. Public official bond
  4. Appeal bond
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A. Fiduciary bond
Fiduciary bonds are court bonds that guarantee people such as executors, administrators, and guardians will properly carry out their duties.

8. A bond required by a city before a business can sell liquor or perform electrical work, guaranteeing the business will follow applicable laws, is a:

  1. Payment bond
  2. Fidelity bond
  3. Judicial bond
  4. License and permit bond
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D. License and permit bond
License and permit bonds guarantee that the licensee will comply with the laws and regulations tied to the license.

9. A fidelity bond is designed to protect an employer against loss caused by:

  1. Fire and windstorm
  2. Lawsuits from customers
  3. A contractor's failure to finish a project
  4. Dishonest acts of its employees
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D. Dishonest acts of its employees
Fidelity bonds, like employee theft coverage, protect against loss from employee dishonesty such as embezzlement.

10. A fidelity bond that covers all employees of a business without naming them or their positions is a:

  1. Individual bond
  2. Name schedule bond
  3. Position schedule bond
  4. Blanket bond
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D. Blanket bond
A blanket bond covers all employees automatically. Name schedule bonds list specific people, and position schedule bonds list specific positions.
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