Surety Companies Fear Cumulative Bonds

It often seems individual’s both part of state and federal governments blindly enact guidelines affecting surety bonds with little knowledge on the subject. Some ill-advised changes were made to Indiana State law a few years ago concerning surety bond requirements; more specifically relating to public officials.

The SFAA has been attempting to change Indiana legislation that was enacted in 2008 altering the nature of public official bonds. Modifications to the surety bond requirement made the public official bond annual. The SFAA is alarmed that the adjustment to the annual bond would make the bond amount cumulative throughout the public official’s term of office. HB 1025 was created to reverse the law two years ago which makes the bond an annual one.

The core reason the SFAA is worried about this cumulative bond is the possibility of claims on bonds much larger than the bond itself. The bond premium is based off of the bond amount, or liability. The problem is, with a continuous bond the liability grows every year an official is active while the premium stays the same which lies at the epicenter of the problem. For example, if a public official is required to obtain a $100,000 annual surety bond and the public official is in office for eight years, the cumulative bond would create an $800,000 exposure for the surety company. This opens up the possibility for a claim to go out against the public official who is backed by the surety company, requiring the surety to cover up to $800,000 for the claim because the bond cumulated over eight years!

The anti-cumulative bond bill already passed the House; it has been ordered for a vote in the Senate in the nearby future; and luckily for surety companies, the new legislation should be enacted in Indiana this year.