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Why and When a Surety Bond is Necessary – Part 1

In a number of estate administration and guardianship matters in our office the need for a bond becomes an issue.  Clients often don’t understand the purpose of a bond and are upset that they need to go through the process of qualifying for one and that there is a cost, which can be several thousand dollars, dependent on the size of the estate.

A surety bond is used in many different industries, including the court system when a fiduciary is involved.  There are three main parties to the surety bond.  The principal is the person to be bonded.  That would be the executor, administrator or guardian in the case of court bonds.  The obligee is the person or entity requiring the bond.  In our case that would be the court, which typically issues a court order detailing the requirements.  The surety company is the third party.  

If the principal does not administer the estate correctly, the party that suffers a loss can file a claim which the surety company will pay.  This could be an heir or a creditor of the estate. The surety company charges a fee or premium for the bond.  The bigger the estate the higher the premium, which renews each year.  Because the surety company could potentially pay large sums if the principal does not administer the estate correctly, it assesses the risk of each individual very carefully.  If the company believes the person to be too risky it will decline to issue a bond.

Now that we understand what a surety bond is and why it is needed, next week we’ll examine under what circumstances a surety bond is necessary.