CAIB 3 Chapter 5 Study Questions with
Answers
Identify the two main classes of bonds issued by surety companies - ✔✔1. Fidelity Bonds
2. Surety Bonds
Briefly explain the purpose of a Fidelity Bond - ✔✔To protect the employer from the dishonest
acts of their employees. Today employees do not purchase their own Fidelity Bonds. Instead
employers purchase employee dishonesty insurance
Identify and explain the three C's that all underwriters take very seriously, and that form the
basis of credit appraisal - ✔✔Character - this involves a review of the company's management
performance. Ensure that the principal is of good character, pays bills promptly and is of good
business reputation
Capacity - this involves an assessment of the principal's ability based on past history.
Capital - the financial capability of the principal to complete the work on hand, in addition to
the project for which bonding is requested
Explain how in many respects surety companies are like banks - ✔✔Suretyship involves the
same process used by bankers in making a loan. Each is being asked to lend their credit to
another. Banks do not lend money to those who do not meet the eligibility requirements.
Surety companies do not bond people who cannot perform obligations
Identify the benefit of suretyship for the principal and the Obligee - ✔✔Principal - added
confidence gained from the fact that the surety is satisfied in their ability to carry out the
required task
Obligee - such guarantees provide them with the confidence needed to undertake various
projects
Identify and define the three parties to any surety agreement - ✔✔Principal - the person
primarily liable
, Obligee - the party to whom someone else is obligated under a contract
Surety - one who undertakes to pay money or to do any other act in the event the principal fails
therein
Identify the three important characteristics of the guarantee made by the surety to the obligee
with respect to the principal - ✔✔1. Is a promise made to the Obligee and not to the principal
2. Is a secondary obligation arising only on the default of the principal
3. Surety's duty to pay arises immediately upon the default of the principal
Identify two methods available to the surety to collect amounts owed to it by the principal -
✔✔1. Assignment to surety of Obligees rights
2. Right of subrogation
In addition to being a three party contract and the principal liable to the surety, identify six
other characteristics of surety bond - ✔✔1. No losses expected
2. Of indeterminate length and non-cancellable
3. Statutory or non-statutory in form
4. Bond limit (penalty)
5. Bond premium
6. Written contract
Explain the characteristic - No losses expected - ✔✔Surety is based on the extension of credit
without risk. Theoretically, the surety expects no losses to occur.
Explain the characteristic - Bond limit (penalty) - ✔✔Reflect the amount of credit given to the
principal by the surety. This limit represents the amount of the penalty which the surety is
prepared to pay in the event the principal should default
Answers
Identify the two main classes of bonds issued by surety companies - ✔✔1. Fidelity Bonds
2. Surety Bonds
Briefly explain the purpose of a Fidelity Bond - ✔✔To protect the employer from the dishonest
acts of their employees. Today employees do not purchase their own Fidelity Bonds. Instead
employers purchase employee dishonesty insurance
Identify and explain the three C's that all underwriters take very seriously, and that form the
basis of credit appraisal - ✔✔Character - this involves a review of the company's management
performance. Ensure that the principal is of good character, pays bills promptly and is of good
business reputation
Capacity - this involves an assessment of the principal's ability based on past history.
Capital - the financial capability of the principal to complete the work on hand, in addition to
the project for which bonding is requested
Explain how in many respects surety companies are like banks - ✔✔Suretyship involves the
same process used by bankers in making a loan. Each is being asked to lend their credit to
another. Banks do not lend money to those who do not meet the eligibility requirements.
Surety companies do not bond people who cannot perform obligations
Identify the benefit of suretyship for the principal and the Obligee - ✔✔Principal - added
confidence gained from the fact that the surety is satisfied in their ability to carry out the
required task
Obligee - such guarantees provide them with the confidence needed to undertake various
projects
Identify and define the three parties to any surety agreement - ✔✔Principal - the person
primarily liable
, Obligee - the party to whom someone else is obligated under a contract
Surety - one who undertakes to pay money or to do any other act in the event the principal fails
therein
Identify the three important characteristics of the guarantee made by the surety to the obligee
with respect to the principal - ✔✔1. Is a promise made to the Obligee and not to the principal
2. Is a secondary obligation arising only on the default of the principal
3. Surety's duty to pay arises immediately upon the default of the principal
Identify two methods available to the surety to collect amounts owed to it by the principal -
✔✔1. Assignment to surety of Obligees rights
2. Right of subrogation
In addition to being a three party contract and the principal liable to the surety, identify six
other characteristics of surety bond - ✔✔1. No losses expected
2. Of indeterminate length and non-cancellable
3. Statutory or non-statutory in form
4. Bond limit (penalty)
5. Bond premium
6. Written contract
Explain the characteristic - No losses expected - ✔✔Surety is based on the extension of credit
without risk. Theoretically, the surety expects no losses to occur.
Explain the characteristic - Bond limit (penalty) - ✔✔Reflect the amount of credit given to the
principal by the surety. This limit represents the amount of the penalty which the surety is
prepared to pay in the event the principal should default
