Why do courts require surety bonds instead of cash or security deposits from litigants, guardians, and other principals?
Generally, courts do not have the capacity to manage and keep track of cash collateral or security deposits. In the past, courts have misplaced deposited funds. Attorneys and their clients also struggled to get their deposits back if they obtained judgments in their favor.
Sureties have the necessary accounts and experience to manage cash collateral effectively, as well as return the deposits to an entitled principal. Additionally, underwriters and agents monitor accounts, and claims personnel investigate claims to ensure they do not wrongfully pay a claim. Sureties must carefully investigate all claims. Prior to investigation, a surety must obtain a “proof of loss” or else it waives a contract provision and exposes itself to liabilities.
Because of these additional services and risks, as well as the surety’s status as a “professional risk taker,” the surety charges premiums on their bonds. The premiums vary depending on the obligation and the bond penalty, as well as numerous other factors.
Since our office underwrites mostly commercial surety bonds, we deal with special hazards. Sureties cannot cancel most commercial surety bonds even if the principal fails to pay premium.
Due to this fact, some commercial surety bonds have high rates, especially if the surety expects the obligation to last a very long time. Examples of long enduring bonds include guardianship bonds and QDOT bonds. Courts would face an extraordinary burden if they had to look after security deposits or cash collateral on long-enduring, non-cancel-able bonds.
Open-penalty bonds present extreme risks to a surety as well. These bonds, such as supersedeas, appeal, and lost instrument bonds, do not have a definite financial obligation. The surety will not know the full amount of the obligation until the litigation ended in order to account for additional sums such as attorneys’ fees, costs, and interest. Open-penalty bonds usually specify the amount of the expected judgment plus additional costs.
Courts look for surety bonds as a stamp of approval. The surety vouches for the principal and tells the court the principal will pay the obligation as well as perform their court ordered duties in the utmost good faith.