Surety Bonds & Construction Guarantees Flashcards
7 cards from real CRIS practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Surety Bonds & Construction Guarantees flashcards as text
Under the Miller Act, which federal construction contracts require both performance and payment bonds?
Answer: Federal contracts over $150,000
The Miller Act requires performance and payment bonds on federal construction contracts exceeding $150,000 to protect the government and subcontractors/suppliers.
What is 'prequalification' in the surety bonding underwriting process?
Answer: The surety's investigation of the contractor's financial strength, experience, and character before issuing bonds
Prequalification is the surety's underwriting process to assess the contractor's three C's — character, capacity, and capital — before agreeing to bond them.
What is the key difference between surety bonds and traditional insurance?
Answer: Insurance transfers risk to the insurer, while surety bonds expect the principal to ultimately reimburse the surety for any losses paid
Unlike insurance where the insurer absorbs the loss, surety bonds are a credit arrangement where the principal is expected to indemnify the surety for any losses paid on their behalf.
When a contractor defaults on a bonded project, which of the following is NOT a typical option available to the surety?
Answer: Terminate the obligee's right to make a claim under the bond
The surety's three standard response options are completion by a replacement contractor, financing the defaulted contractor, or paying the penal sum; the surety cannot extinguish the obligee's legal rights.
What is a 'takeover agreement' in surety bond terminology?
Answer: An agreement between the surety and owner authorizing the surety to complete the project after contractor default
A takeover agreement is executed between the surety and the obligee after contractor default, giving the surety the right and obligation to arrange project completion.
What is a 'Little Miller Act'?
Answer: A state statute modeled after the federal Miller Act that requires bonds on state and local public construction projects
Little Miller Acts are state-level statutes that mirror the federal Miller Act, requiring performance and payment bonds on state and local public construction contracts above certain thresholds.
Which underwriting factors are considered most important in surety bond underwriting, known as the 'three C's'?
Answer: Character, capacity, and capital
Surety underwriters evaluate the three C's: character (integrity and reputation), capacity (experience and expertise), and capital (financial strength) of the contractor.