Kinds of insurance

Surety contracts are designed to protect businesses against the possible dishonesty of their employees. Surety and fidelity bonds fill the gap left by theft insurance, which always excludes losses from persons in a position of trust. A bond involves three contracting parties instead of two. The three parties are the principal, who is the person bonded; the obligee, the person who is protected; and the surety, the person or corporation agreeing to reimburse the obligee for any losses stemming from failures or dishonesty of the principal. The bond covers events within the control of the person bonded, whereas insurance in the strict sense covers loss from random events generally outside the direct control of the insured. In bonding, the surety always has the right to try to collect its losses from the person bonded, whereas in insurance the insurer may not attempt to recover losses from the insured. Of course, under property and liability policies the insurer may attempt to recover from liable third parties under the right of subrogation, but subrogation rights are often not possible to enforce in practice. Bonds are not usually cancelable by the insurer, whereas most insurance contracts, except life, are cancelable by the insurer upon due notice.

Fidelity bonds are written to cover the obligee, usually an employer, against loss from dishonest acts of employees; surety bonds cover not only dishonesty but also incapacity to perform the work agreed upon. Surety bonds are normally written on principals who are acting in an independent or semi-independent capacity, such as building contractors or public officials, whereas fidelity bonds are written on employees acting under the guidance and supervision of their employer. Finally, surety bonds are often issued with the requirement of collateral, whereas fidelity bonds are not. The surety bond is an instrument through which the superior credit of the surety is substituted for the uncertain credit of the principal; hence, if the surety is asked to bond a principal of somewhat doubtful credit, the requirement of cash collateral is frequently imposed.

Fidelity bonds differ according to whether specific persons are named as principals or whether all employees or persons are covered as a group. The latter are most frequently used by employers with a large number of employees, because they offer automatic coverage on given classes of workers, including new employees, and greater ease of administration, including simpler claims procedures. Fidelity bonds are usually written on a continuous basis—that is, they are effective until canceled and have no expiration date. The penalty of the bond (the maximum amount payable for any one loss) is unchanged from year to year and is not cumulative. The bonds specify a discovery period (usually two years) limiting the time for discovering losses after a bond is discontinued. When a new bond is put into effect, it can be written to cover losses that have occurred but are undiscovered before the effective issue date of the bond. A salvage clause also is included, stating the way in which any salvage recovered by the surety from the principal is to be divided between the surety and the obligee. This clause is significant, because the obligee may have losses in excess of the penalty of the bond. Some salvage clauses require that any salvage be paid to the obligee up to the full amount of all losses, and others provide that any salvage be divided between the surety and the obligee on a pro rata basis, in the proportion that each party has suffered loss.

There are various classes of surety bonds. Contract construction bonds are written to guarantee the performance of contractors on building projects. Bonds are particularly important in this field because of the general practice of awarding commercial building contracts to the lowest bidder, who may promise more than can actually be performed. The surety who is experienced in this field is in a position to make sounder judgment about the liability of the various bidders than anyone else and backs up its judgment with a financial guarantee.

Court bonds include several different types of surety bonds. Fiduciary bonds are required for court-appointed officials entrusted with managing the property of others; executors of estates and receivers in bankruptcy are frequently required to post fiduciary bonds.

Other types of surety bonds include official bonds, lost instrument bonds, and license and permit bonds. Public official bonds guarantee that public officials will faithfully and honestly discharge their obligations to the state or to other public agencies. Lost instrument bonds guarantee that if a lost stock certificate, money order, warehouse receipt, or other financial instrument falls into unauthorized hands and causes a loss to the issuer of a substitute instrument, this loss will be reimbursed. License and permit bonds are issued on persons such as owners of small businesses to guarantee reimbursement for violations of the licenses or permits under which they operate.

Life insurance may be defined as a plan under which large groups of individuals can equalize the burden of loss from death by distributing funds to the beneficiaries of those who die. From the individual standpoint life insurance is a means by which an estate may be created immediately for one’s heirs and dependents. It has achieved its greatest acceptance in Canada, the United States, Belgium, South Korea, Australia, Ireland, New Zealand, the Netherlands, and Japan, countries in which the face value of life insurance policies in force generally exceeds the national income.

In the United States in 1990 nearly $9.4 trillion of life insurance was in force. The assets of the more than 2,200 U.S. life insurance companies totaled nearly $1.4 trillion, making life insurance one of the largest savings institutions in the United States. Much the same is true of other wealthy countries, in which life insurance has become a major channel of saving and investment, with important consequences for the national economy.

Life insurance is relatively little used in poor countries, although its acceptance has been increasing.