Property & Casualty Insurance License Test Property & Casualty Insurance License Test Surety Bonds and Specialty Lines Questions and Answers 1 — Questions and Answers
Question 1: Which three parties are involved in every surety bond arrangement?
- Principal, obligee, and surety (Correct answer)
- Insured, insurer, and beneficiary
- Contractor, subcontractor, and owner
- Borrower, lender, and guarantor
Correct answer: Principal, obligee, and surety
A surety bond involves the principal (who must perform), the obligee (who requires the bond), and the surety (the bonding company that guarantees performance).
Question 2: A performance bond guarantees which of the following?
- That a contractor will complete a project according to the contract terms (Correct answer)
- That a contractor will submit the lowest bid on a project
- That an employee will not steal from the employer
- That a court judgment will be satisfied if the defendant loses
Correct answer: That a contractor will complete a project according to the contract terms
A performance bond guarantees that the principal (contractor) will complete the construction project per the contract; if they default, the surety steps in to finish or pay the obligee.
Question 3: What is the primary purpose of a bid bond in the construction industry?
- To guarantee that a contractor who wins a bid will enter into the contract and provide required performance and payment bonds (Correct answer)
- To guarantee that a contractor will pay all subcontractors and suppliers
- To guarantee that the contractor's employees are covered by workers' compensation
- To guarantee that the project will be completed on time
Correct answer: To guarantee that a contractor who wins a bid will enter into the contract and provide required performance and payment bonds
A bid bond assures the project owner that if the bidder wins the contract, they will sign the contract and provide the required performance and payment bonds, or forfeit the bond amount.
Question 4: A fidelity bond differs from a surety bond primarily in that a fidelity bond protects against which type of loss?
- Dishonest acts of employees such as theft or embezzlement (Correct answer)
- A contractor's failure to complete a project
- Failure to obtain required government permits
- A court-ordered financial obligation not being paid
Correct answer: Dishonest acts of employees such as theft or embezzlement
A fidelity bond protects the employer (obligee) from financial losses caused by dishonest acts — theft, embezzlement, forgery — committed by the bonded employee (principal).
Question 5: A license and permit bond is typically required by which party?
- A government entity as a condition of granting a business license or permit (Correct answer)
- A private employer before hiring a new employee
- A lending institution before approving a business loan
- An insurance company before issuing a commercial policy
Correct answer: A government entity as a condition of granting a business license or permit
State and local governments require license and permit bonds to ensure that licensed businesses (contractors, auto dealers, mortgage brokers, etc.) comply with laws and regulations.
Question 6: In surety bond underwriting, the surety has the right to seek reimbursement from the principal for losses paid. This right is known as what?
- Right of indemnity (subrogation against the principal) (Correct answer)
- Right of first refusal
- Duty to defend
- Pro-rata contribution
Correct answer: Right of indemnity (subrogation against the principal)
Unlike insurance, a surety bond is a three-party guarantee — if the surety pays a claim, it has the contractual right to seek full reimbursement (indemnification) from the principal who failed to perform.
Property & Casualty Insurance License Test Property & Casualty Insurance License Test Surety Bonds and Specialty Lines Questions and Answers 1
Which three parties are involved in every surety bond arrangement?