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Glossary of Surety and Construction Law Terms

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See, American Arbitration Association


Acceleration occurs when the contractor is compelled by the owner to complete the project ahead of schedule. But, it comes at a price to the owner. Changes in contract time, whether delay or acceleration, increase the contractor's cost and often become the subject of a claim.

Acceleration clause

A clause in a contract that states that if a payment is missed, or some other default occurs (such as the debtor becoming insolvent), then the contract is fully due immediately. This is a typical clause in a loan contract; miss one payment and the agreement to pay at regular intervals is voided and the entire amount becomes due and payable immediately.

Account Current

An account current is the billing statement an insurance company sends to its producer.

Accounts Receivable Turnover

Measures the internal collection efficiency and potential bad debt exposure. The calculation is: Acct. Rec. X 360 /Annual Revenue. Sureties are looking for a figure of 60 days or less.

Act of God

An event that is caused solely by the effect of nature or natural causes and without any interference by humans whatsoever. Insurance contracts often exclude "acts of God" from the list of insurable occurrences as a means to waive their obligations for damage caused by hurricanes, floods or earthquakes, all examples of "acts of God".


(Addenda) Written information adding to, clarifying or modifying the bidding documents. An addendum is generally issued by the owner to the contractor during the bidding process and as such, addenda are intended to become part of the contract documents when the construction contract is executed.

Additional Insured

A person, company or entity protected by an insurance policy in addition to the insured.


This term is most frequently encountered in the construction industry in the U.K. Adjudication is a binding decision made by an appointed neutral, often a quantity surveyor, either by deciding on the basis of submitted documents, or as is increasingly the case, after a hearing. It is designed to provide a speedy, if not always elegant, resolution to enable work to continue on site without interruption. Either party may appeal the adjudicator's decision to court or arbitration, or indeed settle the dispute by mediation. The Housing, Grants, Regeneration Act 1996 in the United Kingdom has greatly increased the use of adjudication.


A person who investigates and settles losses for an insurance carrier. In the surety industry, those persons are more often referred to as claims representatives, claims attorneys, or consultants.

Administered Arbitration

The parties select an agency (for-profit or not-for-profit) which serves as an intermediary between parties and the arbitrator (like a "middle-man"). The agency's fees are in addition to the arbitrator's.

Admitted Carrier

A company doing business, under a Certificate of Authority issued by the Texas Department of Insurance subject to the laws and regulations of the State of Texas.


See, Alternative Dispute Resolution.

ADR Rider to Bond

While contracting parties in the construction process have been moving towards alternative disputes resolution processes for many years, the surety industry has traditionally favored litigation as the means of resolving its disputes. Increasingly, sureties are embracing mediation and other techniques to avoid and resolve disputes. The Dallas Fort Worth Airport Capital Development Plan’s Subcontractor Master Surety Program marked one of the first efforts to provide a pre-default agreement by sureties to use ADR procedures. The ADR rider to the performance bonds on that project utilize step negotiation, facilitation and a non-binding advisory opinion by a third party neutral in the event of a dispute over the propriety of a subcontractor termination.

Advance Payment Bond

A bond that guarantees repayment or liquidation by the principal of funds advanced in connection with a construction supply or other type of contract.

Advisory Opinion

A nonbinding statement by an arbitrator, facilitator, mediator, or project neutral of its interpretation of the facts and law on a matter submitted for that purpose. Federal Courts are constitutionally prohibited from issuing advisory opinions by the case or controversy requirement.

AGC Surety Bond Committee

One of the standing committees of the Associated General Contractors of America, this committee works closely with the Surety Association of America and the National Association of Surety Bond Producers to develop policy on such issues as directed suretyship, bond forms, and alternative default insurance products.


The authorized representative of an insurance company or companies.


Agent or Broker of Record Letter

Surety companies will work with only one agent representing a principal at any one time. In order to change agent representatives, the surety may require the customer to provide a signed and dated Broker of Record letter spelling out whom the principal want as its agent. The surety may send a copy of the letter to the original agent or broker, allowing the original agent an opportunity to obtain a countermanding broker of record letter.

AIA Documents

The AIA Contract Documents Program, one of the oldest and most comprehensive programs of its kind in the world, develops standardized contract forms and administrative procedures that provide the building industry with a basis for nationwide uniformity for contractual relationships in the design and construction process. Although opportunity for industry-wide input into these documents is afforded, they are decidedly pro-design professional.


A type of contract. The term is usually applied to insurance contracts in which payment is dependent on the occurrence of a contingent event, such as injury to the insured person in an accident or fire damage to his insured building.


An insurance policy which endeavors to cover any loss or damage to an insured property unless such loss is specifically excluded by the policy languge.

Alternate Bid

Amount stated in the bid to be added or deducted from the base bid amount proposed for alternate materials and/or methods of construction.

Alternative Dispute Resolution

Also known as "ADR"; methods by which legal conflicts and disputes are resolved privately and other than through litigation in the public courts, usually through one of two forms: mediation or arbitration. It typically involves a process much less formal than the traditional court process and includes the appointment of a third party to preside over a hearing between the parties. The advantages of ADR are speed and money: it costs less and is quicker than court litigation. ADR forums are also private.

American Arbitration Association

The largest full-service ADR provider in the U.S.  The American Arbitration Association assists in the design and implementation of ADR systems for corporations, unions, government agencies, law firms and the courts.  Administers mediation, arbitration, and dispute review boards.

American Insurance Association

The American Insurance Association ("AIA") is the leading property and casualty insurance trade organization, representing more than 370 insurers that write more than $77 billion in premiums each year. AIA member companies offer all types of property and casualty insurance including fidelity and surety,  personal and commercial auto insurance, commercial property and liability coverage for small businesses, workers' compensation, homeowners' insurance, medical malpractice coverage, and product liability insurance. AIA's roots go back more than 130 years to the establishment of the National Board of Fire Underwriters in 1866. In 1964, the old American Insurance Association merged with the National Board and the Association of Casualty and Surety Companies and became the present-day AIA.


A questionnaire which must be completed, when required, by an applicant for a fidelity or surety bond. On a surety bond, it also may contain the applicant’s agreement to indemnify the surety in the event of loss.

Application for Payment

Contractor's written request for payment for completed portions of the work and, for materials delivered or stored and properly labeled for the respective project.


The instrument providing documentation certifying a company’s desire that an agent represent that company in the sale of insurance or surety products. An agent may be appointed by any number of companies legally doing business in the Texas, but must be sponsored at all times by at least one company to maintain an active license to sell insurance.


See, Arbitrator.


An alternative dispute resolution method by which an independent, neutral third person ("arbitrator") is appointed to hear and consider the merits of the dispute and renders a final and binding decision called an award. The process is similar to the litigation process as it involves adjudication, except that the parties choose their arbitrator(s) and the manner in which the arbitration will proceed.

Arbitration Agreement or Arbitration Clause

A contract by two or more individuals or entities to submit a particular dispute that has arisen or disputes that may arise in the future to arbitration rather than to court. Such an agreement usually specifies the binding nature of the arbitration, that any arbitrator’s decision may be enforced in court, and whether the arbitration proceedings will be confidential.


An arbitrator is independent and impartial and is selected by the parties or on their behalf (by the Institute or by another appointing authority) on the basis of their arbitral/technical expertise, reputation and experience in the field of activity from which the dispute stems.

As-Built Drawings

(also known as Record Drawings) Contract drawings marked up to reflect changes made during the construction process. It is good practice to make As-Built drawings by marking the changes on reproducible drawings such a sepias for the duplication purposes later.

Association of Attorney Mediators

AAM is a nonprofit trade association of qualified, independent attorney-mediators. Members of AAM must meet qualifications and ethical standards which meet or exceed state or Federal requirements for mediators. AAM's role in the mediation process is to help potential users of mediation services find the attorney-mediator best suited to assist the parties in resolving their dispute. AAM fulfills its mission through a National Office located in Dallas, Texas. As a trade association, AAM promotes the use of mediation and protects the mediation process. AAM conducts seminars for attorneys, assists the Judiciary in drafting and implementing local rules and procedures for mediation; submits amicus briefs to the Courts on selected issues involving mediation; and monitors legislation concerning the mediation process. For more information, see http://www.attorney-mediators.org 

Association of Independent Sureties

This is the association for the many small and mid-sized surety companies in the United States.


The act of watching someone sign a legal document, such as a will or power of attorney, and then signing your own name as a witness. When you witness a document in this way, you are attesting -- that is, stating and confirming -- that the person whom you watched sign the document in fact did so. Attesting to a document does not mean that you are vouching for its accuracy or truthfulness. You are only acknowledging that you watched it being signed by the person whose name is on the signature line.

Attorney in Fact

The person to whom authority is given under a Power of Attorney.

Attorney Work Product Privilege

A rule that protects materials prepared by a lawyer in preparation for trial from being seen and used by the adversary during discovery or trial.

Attorney’s Fees

The usual and ordinary meaning of the words “attorney's fees” is the consideration that a litigant pays or becomes liable to pay in exchange for legal representation.

Attorney-Client Privilege

A rule that keeps communications between an attorney and her client confidential and bars them from being used as evidence in a trial, or even being seen by the opposing party during discovery.

Authenticity, Bond

Obligees should always verify the authenticity of surety bonds they are being asked to accept. The most reliable way to authenticate a surety bond is to contact the issuing surety company directly. However, it is often difficult to ascertain the correct address, telephone number or person to contact at the surety. The Surety Association of America has published a guide that  contains a list of surety companies together with information as to how they can be contacted for the purposes of authenticating a bond. This guide is available at http://www.surety.org/obligeus.htm  

Authority, Agent’s Apparent

Authority of an agent that is created when the agent oversteps actual authority, and when inaction by the surety or insurance company does nothing to counter the public impression that such authority exists.

Authority, Agent’s Express

Express authority is exemplified by the agent’s agency agreement which is kept on file by the agent and sponsoring company. It is also exemplified in the power of attorney granting the agent power and authority to take certain acts or bind the company to specified obligations.

Authority, Agent’s Implied

Although certain functions an agent may perform are not set out in the express authority documentation (agency agreement or power of attorney), the routine performance of these may lead the public to reasonably believe the agent has been given express authority where none exists.


The decision of an arbitrator or other non-judge in a dispute submitted to him or her.

Back Charge

Billings for work performed or costs incurred by one party that, in accordance with the agreement, should have been performed or incurred by the party to whom billed. Owners bill back charges to general contractors, and general contractors bill back charges to subcontractors. Examples of back charges include charges for cleanup work or to repair something damaged by another subcontractor, such as a tub chip or broken window.

Bad Faith

Accusations by policyholders that insurers took steps to deliberately delay, underpay, or deny a claim.

Baseball Arbitration

In this process, used increasingly in commercial disputes, each party submits a proposed monetary award to the arbitrator. At the conclusion of the hearing, the arbitrator chooses one award without modification. This approach imposes limits on the arbitrator's discretion and gives each party an incentive to offer a reasonable proposal, in the hope that it will be accepted by the decision-maker. A related variation, referred to as "night baseball" arbitration, requires the arbitrator to make a decision without the benefit of the parties' proposals and then to make the award to the party whose proposal is closest to that of the arbitrator

Bid Bond

A bid bond assures the owner that, upon acceptance of the contractor's proposal, the contractor will proceed to enter into a contract and will furnish performance and payment bonds if required by the bid documents.  Failure to sat­isfy these requirements generally leads either to forfeiture of the bid bond (usually in the penal sum of 5% to 20% of the bid) or more commonly, pay­ment of the difference between the bidder's price and the second low bidder's price or the bond amount, whichever is less. Bid bonds are often required on public projects where formal competitive bidding is required, but are less frequently used on private projects. 

Bid Listing

A procurement system in which a general contractor must submit with its bid the names of the subcontractors they intend to use if awarded the contract.

Bid Shopping

A practice by which contractors, both before and after their bids are submitted, attempt to obtain prices from potential subcontractors and material suppliers that are lower than the contractors' original estimates on which their bids are based, or after a contract is awarded, seek to induce subcontractors to reduce the subcontract price included in the bid.

Bid Shopping

The practice of a general contractor asking, requiring, or otherwise pressuring a subcontractor to lower bids for subcontracts, or accepting lower bids from subcontractors, after submitting a bid without passing the savings from the lower bids back to the project owner. Some states prevent bid shopping by “bid listing,” a system in which a general contractor must submit with its bid the names of the subcontractors they intend to use if awarded the contract.

Bills Paid Affidavit

An affidavit executed by a contractor or subcontractor in connection with interim or final payments wherein the contractor or subcontractor states, under oath, that it has either paid all of its bills on a project, or that that it has paid all bills for work performed during previous draw periods and that it will pay all bills associated with the payment to be made in reliance on the affidavit. While the affidavit does not relieve the recipient from responsibility for claims that may be filed if the affidavit is not truthful, the person signing the affidavit faces potential civil and criminal sanctions for filing a false affidavit.

Bonding Around a Lien

The process of posting a bond to indemnify a property owner, title company, or lender from liability for a filed mechanic’s lien is known as “bonding around.” The process may take the form of statutory bond to release a recorded lien, or a common law obligation to indemnify parties who rely on such a bond.

Bonding Company

Same as a “Surety”


Three-party agreements in which the issuer of the bond (the surety) joins with the second party (the principal) in guaranteeing to a third party (the obligee) the fulfillment of an obligation on the part of the principal. An obligee is the party (person, corporation or government agency) to whom a bond is given. The obligee is also the party protected by the bond against loss.

Bonus-Penalty Clause

A positive/negative incentive to comply with a schedule. A bonus is paid for timely performance; a penalty is assessed for untimely performance. The dollar amount of the bonus and penalty must be equal.

Book of Business

The number, size and type of accounts that an agent services, and upon which he earns commissions.


A report, listing the risks reinsured, that the ceding company regularly provides to the reinsurer.  This report typically includes the insured's name, premium basis, premium and the amount of coverage.

Broad Form Indemnity

See, Indemnity Clauses

Broad Form Property Coverage including Completed Operations

A coverage extension that is of great value to the general contractor as respects "completed operations" property damage liability claims. Without it, the normal Comprehensive General Liability policy will not respond for "completed operations" claims (i.e., claims rising out of work performed on behalf of the insured by subcontractors). With this coverage extension, this exposure is covered. Additional broadening coverage features are also included, but none as important as the above to the general contractor.


Individual or organization representing a contractor in soliciting, negotiating or buying a surety bond and rendering services incidental to these functions. No such designation exists under Texas Insurance Licensing Law, and while the term usually connotes someone who primarily represents the insured or principal, the term has become virtually synonymous with the term “agent.”

Builder’s Risk Insurance

Indemnifies for loss of or damage to a building under construction. Insurance is normally written for a specified amount on the building and applies only in the course of construction. Coverage customarily includes fire and extended coverage and vandalism and malicious mischief. Builders risk coverage can be extended to a "special" form as well. The builders risk policy also may include coverage for items in transit to the construction site (up to a certain percentage of value) and items stored at the site.

Business Plan

A blueprint and communication tool for your business. A device to help you, the owner, set out how you intend to operate your business. A road map to tell others how you expect to get there.

Buy-Sell Agreement

Buy-Sell Agreement: An agreement made by the owners of a business to purchase the share of a disabled or deceased owner. The value of each owner's share of the business and the exact terms of the buying-and-selling process are established before death or the beginning of disability.


A term that refers to the size of a bond which a surety is able to write. Capacity is determined by a combination of factors, including  the amount of capital and surplus a surety possesses, available reinsurance, and regulatory restrictions.

Capital and Surplus

The sum of paid up capital, gross paid in and contributed surplus and unassigned surplus.

Capital Retention Agreement

Partial wavers of personal indemnity on surety bonds are occasionally granted where the contractor agrees to maintain certain financial ratios, such as working capital or equity.

Captive Agent

A licensed insurance agent who sells insurance or bonds for only one company.

Captive Insurance Company

A company owned solely or in large part by one or more non-insurance entities for the primary purpose of providing insurance coverage to the owner or owners. The company's stock is controlled by one interest or a group of related interests so as to provide coverage for their business operations. A captive insurance company may be a non-admitted, nonresident, or foreign insurer. Sometimes it may provide reinsurance to a self- insured or a domestic company.

Cardinal Change

A truly fundamental change by the obligee in the nature of the bonded contract is a breach of contract which discharges the principal from its obligations to perform further. This type of change is usually referred to in the case laws as a “cardinal change.” When a cardinal change in the bonded contract is found to occur, both the contractor and the surety will be discharged from further performance.


Private meeting or series of meetings that take place in concert with a dispute resolution process. Can include a meeting between the neutral third party and each of the interested parties separately. In large scale group processes, it can consist of an informal meeting of parties with similar interests. The caucus serves to give parties a chance to create new alternatives, clarify their proposals and interests, gather information, and/or allow for a "cool-down period."


To transfer all or part of a risk written by an insurer (the ceding, or primary company) to a reinsurer.

Ceding Company

The insurer which cedes all or part of the insurance or reinsurance it has written to another insurer. A company which has placed reinsurance, distinguished from the company that accepts it.

Certificate of Insurance

A statement of coverage issued to an individual insured under a group insurance contract, outlining the insurance benefits and principal provisions applicable to the member.

Change Order

A written document between the owner and the contractor signed by the owner and the contractor authorizing a change in the work or an adjustment in the contract sum or the contract time. A change order may be signed by the architect or engineer, provided they have written authority from the owner for such procedure and that a copy of such written authority is furnished to the contractor upon request. The contract sum and the contract time may be changed only by change order. A change order may be in the form of additional compensation or time; or less compensation or time known as a Deduction (from the contract) the amount deducted from the contract sum by change order.


A term used to describe one making a claim against a bond, or one making a claim in a non-judicial dispute resolution proceeding. Those persons or entities who are entitled to make a claim against a statutory bond are defined in those statutes. In the case of non-statutory bonds, the definition of a claimant will usually be set forth in the bond.

Claims Made Policy

A liability insurance policy under which coverage applies to claims filed during the policy period.


A surety company may occasionally request collateral to reduce the risk of the bond. Collateral is sometimes required for higher risk principals or unusual obligations. There are many forms in which collateral may be provided, including cashiers checks, certificates of deposit or irrevocable letters of credit. In addition, collateral reduces the risk a surety company assumes when issuing a bond. After all obligations of the bond have been met, the obligee releases the surety company from their obligation under the bond and the collateral is returned to the principal.

Combined Ratio

A measure of the relationship between dollars spent for claims and expenses and premium dollars taken in; more specifically, the sum of the ratio of losses incurred to premiums earned and the ratio of commissions and expenses incurred to premiums written. A ratio above 100 means that for every premium dollar taken in, more than a dollar went for losses, expenses, and commissions.


The part of an insurance premium paid by the insurer to an agent or broker for his services in procuring and servicing an insurance or surety account.

Common Law Bond

A non-statutory bond, one on which the rights and obligations are determined by it terms or the law of contract.

Completed Operations

Liability arising out of faulty work performed away from the premises after the work or operations are completed. Applicable to contractors, plumbers, electricians, repair shops, and similar firms. This form of liability insurance provides coverage for bodily injury and property damage rising from completed or abandoned operations, provided the incident occurs away from premises owned or rented by the insured. Operations are deemed completed at the earliest of: (1) when all operations to be performed by or on behalf of the insured under contract have been completed; (2) when all operations to be performed by or on behalf of the insured at the site of the operations have been completed; (3) when the portion of work out of which injury or damage rises has been put to its intended use by a party other than the contractor or subcontractor.

Completing Contractor

In a surety default situation, the contractor retained by the surety or the obligee to complete the bonded obligation. Occasionally, the defaulting contractor may serve in this capacity, although under the surety’s supervision and control.

Completion Agreement

Agreement signed between the surety for a defaulting contractor and a contractor chosen to complete the bonded obligation. The essential purpose of the agreement between the surety and replacement contractor is to delineate the areas of responsibility with respect to completion of the bonded contract and payment therefor. These responsibilities may be outlined in a separate agreement between the surety and replacement contractor, or in one instrument executed by the surety, obligee and replacement contractor.

Completion Bond

This is a bond issued to a mortgagee. It guarantees that the construction for which the mortgagor has borrowed money will be completed and will be able to serve as collateral for the mortgage upon completion

Condition Precedent

A contractual condition that suspends the coming into effect of a contract unless or until a certain event takes place. Many residential real estate contracts have a condition precedent which states that the contract is not binding until and unless the property is subjected to a professional inspection, the results of which are satisfactory to the purchaser. Compare with "condition subsequent".

Consent of Surety

Many contracts require, and good practice dictates, that a surety’s consent be obtained in connection with final payment of retainage under a bonded contract, or any time that payment is being made in the face of potential claims or defaults. In this manner, the surety cannot be heard to later complain that contract balances, to which it looks for security, were released prematurely.

Consequential Damage

Damage that results as a consequence rather than directly from some failure to meet an obligation.  If a contractor agrees to build a hotel for $ 1 million and defaults, and the owner spends $ 200,000 more than the original $ 1 million to complete the work, the $ 200,000 is a direct damage. If the opening of the hotel was delayed beyond the prime tourist season, causing the hotel operator to lose those revenues, and in turn future business, those losses are consequential damages.


The optimizing of cost, time, and quality factors with the contracting structures and techniques used on a project; accomplished by matching owner contracting requirements with available construction industry practices.

Construction Industry Rules of the American Arbitration Association

Representatives of the twenty-two construction industry organizations l constitute the National Construction Dispute Resolution Committee (NCDRC) of the American Arbitration Association. This committee is the sponsor of the arbitration and mediation procedures specially designed for the construction industry by the AAA. The rules may be found at www.adr.org 

Construction Law Section of the State Bar of Texas

The Construction Law Section of the State Bar of Texas is a section of the State Bar of Texas which serves as an educational and networking forum for the State’s construction and surety lawyers. Papers from its annual two day conferences are posted at www.constlaw.org 

Construction Management

A construction delivery method where the construction manager serves as either the agent (“Construction Manager-Agent” or “Pure Construction Manager”) for the project owner, or as the general contractor (“Construction Manager at Risk”) for a project, providing pre-construction and construction services.

Constructive Acceleration

Constructive acceleration occurs in the absence of an owner directed acceleration, such as where the owner has refused a valid request for time extensions or threatened other action which requires the contractor to accelerate its work to avoid liquidated damages, or other loss or risk of loss. The classic case is when a request for a time extension for excusable delay is denied and the contract provides liquidated damages for late completion. The law construes this as an order by the owner to complete performance within the originally specified completion date, a shorter period at higher cost than provided for in the contract. The constructive acceleration doctrine allows recovery for the additional expenses the contractor can establish.


An amount or percentage of the total construction budget included in a guaranteed maximum price contract to address additional costs arising during the construction of the project. The contractor’s contingency is usually under the control of the contractor and covers such things as unanticipated costs, minor mistakes in bidding or performance of work, defaults by suppliers and subcontractors, etc. An owner’s contingency is usually a fund outside of the contract sum, controlled by the owner, for changes in the work or schedule not contemplated at bid time. The failure to identify the nature of the contingency, its use and control, is a frequent cause of dispute which could be easily avoided by careful contract drafting.

Contingent Payment Clause

A clause in a subcontract that makes payment from the owner to the general contractor a condition precedent to the subcontractor’s right to payment from the general contractor.  Also known as a “pay if paid” clause. Contrast this with “pay when paid” clauses that speak to the timing of payment rather than liability for payment.


A covenant or agreement between two or more parties to do or not to do certain things. The terms of a contract are expressed, either orally or in writing, and each party agrees to do or not to do the recited things. Same as an “agreement.”

Contract Balance

The original contract price, including adjustments for changes, less the amount paid to the contractor in accordance with the contract terms.

Contract Bond

A bond given to secure the performance of a contract. Frequently, two bonds are required – one to cover performance and the other to cover payment of certain labor and material bills. The former is commonly known as a performance bond, and the latter is known as a payment bond.

Contract Price

The whole sum of money which passes from the owner to the contractor when final settlement is made between the parties to the contract. The contract price is used as the basis for the premium charge on most types of construction and supply contract bonds.

Cost Plus or Cost Plus Fee Agreement

An agreement under which the contractor is reimbursed for its direct and indirect costs and, in addition, is paid a fee for its services. The fee is usually stated as a percentage of cost, but may be a fixed amount. The agreement may or may not include a guaranteed maximum price or a savings split.


One of a group of sureties directly participating in a bond with obligations joint and several.


A signature of a licensed domiciled agent or representative, required by the laws of some states in order to validate a bond.

Court-Annexed Mediation

Any ADR process which parties may be required or advised to undertake by the court, or an ADR facility which is offered by the court.

Current Ratio

The ratio of current assets to current liabilities. Bond underwriters like this ratio to be 2 to 1 or better on the balance sheets of contractors for whom they are considering contract bonds. If it drops below 1.0, the ability to pay bills is impaired. If it is much greater than 2.0, there is a possibility that assets are not being used efficiently to generate new revenue.

Cut Through Clause

A clause, rider, or endorsement occasionally found in treaties which allows the obligee on a bond to recover directly from the reinsurer in the event of a failure by the surety (reinsured) to pay a loss due to specified circumstances. Because there are entirely separate contractual relationships as between obligee and surety (reinsured) and between reinsured and reinsurer, there is no privity of contract between insured and reinsurer absent such a clause. 


A common abbreviation meaning "doing business as." The abbreviation is usually in lower-case letters: "Bubba Smith d/b/a Bubba’s Backhoe Service."


In a lawsuit, money awarded to one party based on injury or loss caused by the other. There are many different types or categories of damages that occasionally overlap, including: compensatory, punitive, nominal, consequential, and treble.

Debt to Net Worth Ratio

A ratio of total debt to net worth that measures the equity the owners have in the construction company compared to the interests of outsiders.  Sureties look for a ratio of 3:1 or less.


An agreed specified sum to be deducted from the amount of loss and assumed by the insured


An amount which a policyholder agrees to pay, per claim or per accident, toward the total amount of an insured loss.


A failure to perform a legal duty, observe a promise, or fulfill an obligation. For example, the word is often used for the failure to make a payment on a debt once it is due.

Default Insurance

A relatively new form of insurance that protects an insured against the losses caused by the defalcation of another party.

Delivery Methods

Various methods and contractual arrangements for contracting for the design, construction, and delivery of construction projects. Examples would include Construction Management (both pure or agency, and at risk), Design-Build, and Design-Bid-Build


The most common construction delivery method. The owner contracts with a design professional, and requests bids from a contractor, contracting separately with the designer and contractor.


A construction delivery method where a single entity is contracted to provide both design and construction.

Direct Writer

The industry term for a company which uses its own sales employees to write its policies. Sometimes refers to companies which contract with exclusive agents.

Direct Written Premium

The entire premium arising from bonds or policies issued directly by the primary insurance company to policyholders.

Directed Suretyship

Owner designation of a specific producer or surety company from which contractors must obtain surety bonds. The federal government and several states have enacted legislation expressly prohibiting this practice.

Dispute Review Board or DRB

A construction dispute avoidance and resolution technique involving the selection of three experienced, respected, and impartial observers before construction begins. The Board meets at the job site periodically. Members are provided with the contract plans and specifications, become familiar with the project procedures and the participants, and are kept abreast of job progress and developments. When any dispute arises that cannot be resolved by the parties, it is referred to the DRB for a non-binding ruling which typically must be followed pending the exercise of other contract dispute resolution procedures.

Do Nothing Option

After carefully investigating and considering all issues associated with a default, a surety may determine that it, indeed, has no obligation to perform and may communicate to the obligee that it will not perform.  This is the surety’s “do nothing” option…although it will usually be doing something…preparing for the litigation that often results when the obligee takes exception to that position. This term has often been misunderstood to refer to a surety’s supposed option to simply stand by its principal’s position without the benefit of further investigation and analysis. Most responsible sureties would suggest the latter option does not really exist.

Dual Obligee Bond

A bond which names as additional obligee a lender or other party, putting them in a position to invoke the performance features of the bond. Obligees are most often added to the bond by a Dual Obligee Rider to the bond, rather than being named in the body of the bond.

Eichleay Formula

The Eichleay formula, first articulated in Eichleay Corp., ASBCA No. 5183, 60-2 BCA 2688, affd on reconsideration, 61-1 BCA 2894, is intended as a mechanism for computing the compensation a contractor can appropriately recover for unabsorbed overhead due to a Government caused suspension or delay. The formula first determines the pro rata share of the contractor’s total overhead that is allocable to the delayed contract. It then converts that into an amount per day, and finally the appropriate daily rate is multiplied by the number of days for which compensation is owed.

Equitable Subrogation

The rationale for equitable subrogation stems from the notion that those contract proceeds that are reserved for disbursement until the contract's completion are as much for the indemnity of him who may be a guarantor of the performance of the contract as for him for whom it is to be performed. It is well settled in our law that the surety whose funds go to discharge contractor's obligations is thereby subrogated to the rights of the owner to apply the contract balances to the completion of the project and payment of bills incurred in that connection. The completing surety is subrogated to the rights of other parties to the bonded project as well. A surety that fulfills a defaulting contractor's obligations is subrogated to the rights of (1) the contractor, insofar as it is due receivables, (2) the material men and laborers who may have been paid by the surety, and (3) the owner for whom the project was completed. The completing surety's right of subrogation arises in equity as an outgrowth of the suretyship relationship itself; it is not dependent on assignment, lien or contract.

Errors & Omissions Insurance

Liability insurance policy that provides protection against loss incurred by a client because of some negligent act, error, or omission by the insured.


Professional standards of conduct. Standards of fair and honest conduct in general.

Evaluative Mediation

Evaluative mediation is a process modeled on settlement conferences held by judges. An evaluative mediator assists the parties in reaching resolution by pointing out the weaknesses of their cases, and predicting what a judge or jury would be likely to do. An evaluative mediator might make formal or informal recommendations to the parties as to the outcome of the issues. Evaluative mediators are concerned with the legal rights of the parties rather than needs and interests, and evaluate based on legal concepts of fairness. Evaluative mediators meet most often in separate meetings with the parties and their attorneys, practicing “shuttle diplomacy”. They help the parties and attorneys evaluate their legal position and the costs vs. the benefits of pursuing a legal resolution rather than settling in mediation. The evaluative mediator structures the process, and directly influences the outcome of mediation.

Evaluative mediation emerged in court-mandated or court-referred mediation. Attorneys normally work with the court to choose the mediator, and are active participants in the mediation. The parties are most often present in the mediation, but the mediator may meet with the attorneys alone as well as with the parties and their attorneys. There is an assumption in evaluative mediation that the mediator has substantive expertise or legal expertise in the substantive area of the dispute. Because of the connection between evaluative mediation and the courts, and because of their comfort level with settlement conferences, most evaluative mediators are attorneys.

Evergreen Clause

One that specifically states the expiration of a letter of credit will not take place without notice by the issuer and one that allows the issuer to conduct an annual review of the account party's financial condition.  If prior notice of expiration is not given by the issuer, the letter of credit is automatically extended for one year.

Excess of Loss Reinsurance

A generic term describing reinsurance which, subject to a specified limit, indemnifies the ceding company against the amount of loss in excess of the specified retention. It includes various types of reinsurance, such as Catastrophe, Per Risk, Per Account, and Aggregate Excess of Loss. Contrast with Pro Rata Reinsurance. A form of reinsurance which indemnifies the ceding company for that portion of the loss resulting from a single occurrence, however defined, that exceeds a predetermined amount, which is referred to as a first loss retention or deductible.

Expense Ratio

The ratio of a company's operating expenses including acquisition costs to premiums written or earned.


A collaborative process involving the use of a neutral third party (facilitator) to design and oversee a group process. Facilitation is used to help a group reach a goal or complete a task to the mutual satisfaction of participants. Often used when there are many interested parties or stakeholders, as opposed to mediation which tends to focus on a single issue dispute between two parties. (see Facilitator)

Facilitative Mediation

In facilitative mediation, the mediator structures a process to assist the parties in reaching a mutually agreeable resolution. The mediator asks questions; validates and normalizes parties' points of view; searches for interests underneath the positions taken by parties; and assists the parties in finding and analyzing options for resolution. The facilitative mediator does not make recommendations to the parties, give his or her own advice or opinion as to the outcome of the case, or predict what a court would do in the case. The mediator is in charge of the process, while the parties are in charge of the outcome.

Facilitative mediators want to ensure that parties come to agreements based on information and understanding. They predominantly hold joint sessions with all parties present so that the parties can hear each other's points of view, but hold caucuses regularly. They want the parties to have the major influence on decisions made, rather than the parties’ attorneys.

Facilitative mediation grew up in the era of volunteer dispute resolution centers, in which the volunteer mediators were not required to have substantive expertise concerning the area of the dispute, and in which most often there were no attorneys present. The volunteer mediators came from all backgrounds. These things are still true today, but in addition many professional mediators, with and without substantive expertise, also practice facilitative mediation.


A person competent in the use of dispute resolution who provides a neutral's services to groups (usually more than two) involved in a dispute or conflict. The facilitator provides procedural assistance to the parties, enhancing information exchange and working with the parties to develop and evaluate possible agreements that could lead to a resolution.


In the context of a construction contract, this is the sum, either fixed, percentage or imputed that the contractor receives to cover his home office overhead and profit.

Fidelity & Surety Committee of the ABA

A subcommittee of the Tort and Insurance Practice Section of the American Bar Association. This subcommittee is one of the most active in the American Bar and is the source of most scholarly writing and educational materials on surety and fidelity claims law and practices in the U.S.

Fidelity Bond

Bonds designed to guarantee honesty. Generally, the bond guarantees honesty of employees. These bonds cover losses arising from employee dishonesty and indemnify the principal for losses caused by the dishonest actions of its employees.

Financial Guarantee Bond

A guarantee that others will pay sums of money due. A Sales Tax Bond, for instance guarantees the state that the merchant will pay his sales taxes on time and in full.

Financing by Surety

The surety providing direct or indirect financial assistance to the principal in the hope that the obligations secured by the performance bond will be completed by the principal.

Fixed Assets to Net Worth

A ratio that Indirectly measures liquidity showing what part of "permanent" assets are covered by "permanent" capital

Flow Down Provisions

A contract provision by which the parties incorporate the terms of the general contract between the owner and the general contractor into the lower tier agreement.

Follow the Fortunes

A phrase referring to a provision found in some reinsurance contracts stipulating that once a risk has been ceded, the reinsurer is bound by the same fate as the ceding company for that risk.

Forfeiture Bond

Type of bond that upon default of the Principal (breach of the condition of the bond) calls for the full amount of the bond (the bond penalty) to be paid to the Obligee on demand

Friend of the Project

A term coined by the American College of Construction Lawyers to describe a dispute avoidance and resolution process wherein a project advocate or friend of the project represents the project itself and not any of the contracting parties.


A situation where the ceding company retains a very small part of a risk and reinsures the large majority of it with one or more reinsurers.

Funds Control

A method of taking control of contract funds to ensure subcontractors and suppliers will be paid appropriately and that contract proceeds remain dedicated to the bonded contract..

General Agreement of Indemnity

See, General Indemnity Agreement.

General Conditions (contract provisions)

A written portion of the contract documents set forth by the owner stipulating the contractor’s minimum acceptable performance requirements including the rights, responsibilities and relationships of the parties involved in the performance of the contract. General conditions are usually included in the book of specifications but are sometimes found in the architectural drawings.

General Conditions (project overhead/labor)

Field-related tasks required to execute a contract.  Common general condition cost components include: Labor supervision, temporary facilities, including trailers, portable toilets and temporary plants, personal protective equipment, travel and per diem, permits, sales and labor taxes, insurance and bonds. General condition costs can be estimated as a percentage of direct project cost. General condition cost percentages tend to be higher for small projects and smaller for large projects.

General Indemnity Agreement

An agreement whereby the Principal and individual indemnitors agree to make a reimbursement to the surety for any loss the surety may incur under the bond. These agreements usually contain provisions allowing the surety certain controls over disputes and access to information and collateral. They may provide for the posting of collateral in the event of an imminent default. They usually contain a grant of a security interest in addition to the equitable rights the surety may already have in job receivables, equipment, work in process, etc. These agreements are to a surety what loan agreements, security agreements, personal guaranties, and financing statements are to a banker.

General Partner

General partners are liable for all of their partnership’s debts.

Government Code Bond

Performance and Payment Bonds written on Texas public works projects in accordance with Chapter 2253 of the Texas Government Code.

Guaranty Fund

A fund, derived from assessments against solvent insurance companies, to absorb losses of claimants against insolvent insurance companies.

Hard Market

That part of the insurance sales cycle in which competitive pricing is at a minimum as companies charge the premiums necessary to meet their underwriting losses in order to avoid insolvency and boost capacity; usually associated with a sharp decline in capacity. See also Soft market.

Hardeman Act

The popular name of the original  law establishing the procedures for perfecting mechanic’s and materialmen’s liens and bond claims on private construction projects in Texas. It has since been amended several times and codified as Chapter 53 of the Texas Property Code.

High-Low Arbitration

The parties agree privately without informing the arbitrator that the arbitrator's final award will be adjusted to a bounded range. Example: P wants $200,000. D is willing to pay $70,000. Their high-low agreement would provide that if the award is below $70,000, D will pay at least $70,000; if the award exceeds $200,000, the payment will be reduced to $200,000. If the award is within the range, the parties are bound by the figure in the award.

Hold Harmless  Agreement

An agreement to pay certain claims that might come up against another person.

Implied Contract

A contract with existence and terms determined by the actions of the persons involved, not by their words.

Implied Warranty

An unstated promise, imposed on a seller, that what is sold is fit for normal use, or, if the merchant knows what the buyer wants the thing for, that it is fit for that particular purpose. Unless these implied warranties are expressly excluded (for example, by clearly labeling the thing sold "as is"), a seller will be held to them

Impossibility of Performance

In contracts in which the performance depends on the continued existence of a given person or thing, an implied condition is that the perishing of the person or thing shall excuse performance. One is not excused from performance merely because performance becomes more expensive than originally contemplated. Mere unforeseen difficulty or expense does not constitute impossibility and is not ordinarily an excuse.

Incentive Clause

A contractual provision which provides payments beyond the stated amount in the contract if completion is ahead of schedule or if other objectives are reached which may involve cost savings, safety, quality or absence of disputes.  

Indefinite Delivery Contract

Indefinite-Delivery Contracts: There are three types of indefinite-delivery contracts, i.e., definite quantity contracts, indefinite quantity, and replacements contracts. (a) A definite quantity contract provides for delivery of a definite quantity of supplies or services for a fixed period, with deliveries to be scheduled at designated locations upon order. (b) An indefinite quantity contract provides for an indefinite quantity, within stated limits, of specific supplies or services to be furnished during a fixed period with deliveries to be scheduled by placing orders with the contractor. The contract shall require the government to order and the contractor to furnish at least a stated minimum quantity of supplies or services and, if ordered, the contractor to furnish any additional quantities not to exceed a stated minimum  Indefinite quantity contracts are sometimes referred to as task order and delivery order contracts. A task order contract means a contract for services that does not procure or specify a firm quantity of services (other than a minimum or maximum quantity) and that provides for issuance of orders for the performance of tasks during the period of the contract. A delivery order contract means a contract for supplies that does not procure or specify a firm quantity of supplies (other than a minimum or maximum quantity) and that provides for the issuance of orders for the delivery of supplies during the period of the contract. (c) A requirements contract provides for filling all purchase requirements of designated government activities for supplies or services during a specified contract period, with deliveries to be scheduled by placing orders with the contractor.


To save another harmless from loss or damage, such as a contractor agreeing to indemnify an owner against a loss.


An entity or person who enters into an agreement with a surety to hold the surety harmless from loss incurred as a result of issuing a contract bond to an applicant who falls just short of acceptability. If the principal defaults, the indemnitor, rather than the surety, assumes the obligation.

Indemnity Clause

There are typically three parts to an indemnity clause.  One party agrees to (1) indemnify, (2) defend, and (3) hold harmless the other party.  By “indemnifying” the first party is  agreeing to reimburse the second party for its losses after those losses have been determined by litigation, arbitration, or settlement.  By “defending,” the first party is agreeing to pay for the second party’s legal expenses as it defends the claim brought by some third party.  By agreeing to “hold harmless” the second party, the first party agrees to protect the second party against harm from suits by third parties. Indemnity clauses fall into three groupings.  These are commonly called “broad form,” “intermediate form,” and “narrow form.”  Broad form indemnity, as its name implies, requires the first party to indemnify the second party for all damages arising out of the project whether caused by the first party, a third party, or even the second party. Intermediate form indemnity also shifts much risk to the consultant – but not as drastically as does the broad form.  It may state, for example, that the consultant will indemnify the client for all damages caused “in whole or in part” by the consultant.  This language can be deceptively subtle. Courts interpret it to mean that if the consultant contributed even just a little bit to causing the damages, it will be required to indemnify the client for ALL of the damages, including those caused by the client’s negligence.  Narrow form indemnity requires the first party to indemnify the second party only for those damages caused by the first party’s negligence. 

Independent Contractor

One who contracts to perform certain functions or deliver goods by his own methods and without being subject to the control of another party except as to the results. Many obligations attach to an employer that are not present when the same work is performed by an independent contractor.

Indirect or “Backdoor” Financing

The concept of indirectly financing a principal in a near default situation is sometimes called “backdoor financing.” Such indirect financing may take the form of direct payments to the principal’s creditors to help get current on delinquent obligations, providing additional bonds to the principal, or a loan guarantee at a bank.

Intermediate Form Indemnity

See, Indemnity Clauses

Irrevocable Letter of Credit

See also, Letters of Credit. Irrevocable credits may not be modified or canceled by the customer. The customer's issuing bank must follow through with payment to the seller so long as the drawer complies with the conditions listed in the letter of credit. Changes in the credit must be approved by both the customer and the drawer. If the documentary letter of credit does not mention whether it is revocable or irrevocable, it automatically defaults to irrevocable.

Job Order Contracting

A construction delivery method for contracting for the minor repair, rehabilitation, or construction of a project when the work is of a recurring nature but the delivery times, type, and quantities of work required are indefinite.

Joint and Several Liability

Liability of more than one person for which each person may be sued for the entire amount of damage done or owed by all.

Joint Control

Control of the handling of project funds by both the Surety (bonding company) and the principal. Funds are kept in joint accounts, and disbursements made only with both signatures so the Surety can assure itself that the affairs of the project are being handled properly

Joint Venture

A "one-shot" grouping together of two or more persons in a business. If they have a continuing relationship, it may be a partnership.


That part of an affidavit where the officer certifies that the same was "sworn" before him. The jurat is usually in the following form: 'Sworn and subscribed before me, on the ___ day of ___, 2002,  (signature of Notary Public)'

Labor & Material Payment Bond

See, Payment Bond

Large, Complex Construction Case Procedures (A.A.A.)

The AAA Procedures for Large, Complex Construction Disputes are designed for cases involving claims of at least $1 million. Key features include: mandatory use of the procedures in cases involving claims of $1 million or more; a highly qualified, trained Panel of Neutrals, compensated at their customary rates; a mandatory preliminary hearing with the arbitrators, which may be conducted by  telephone; broad arbitrator authority to order and control discovery, including depositions; presumption that hearings will proceed on a consecutive or block basis.

Letter of Credit

There are many types of letters of credit. The type used to guarantee a contractor's performance is a "standby" letter of credit in which a bank stands ready to pay over the amount of the letter to the owner of the project (obligee) in the event of default. A letter of credit differs significantly from a surety bond and one is not a substitute for the other. The Miller Act which applies to federal construction recognizes this fact and does not permit the use of a letter of credit to guarantee performance of such contracts.

Letter of Intent

During the course of negotiating a construction contract or subcontract, the parties may wish to begin performance before there has been final agreement.  A letter of intent is often issued as a directive to commence work with an agreement to pay for that work if a final agreement is not reached.

Liability Insurance

Insurance covering the policyholder's legal liability resulting from injuries to other persons or damage to their property.

License & Permit Bonds

A term used to refer to bonds which are required to obtain a license or permit in any city, county or state. These bonds guarantee whatever the underlying statute, state law, municipal ordinance or regulation requires. They may be required for a number of reasons, for example the payment of certain taxes and fees and providing consumer protection as a condition to granting licenses related to selling real estate or motor vehicles and contracting services.


A property right which remains attached to an object that has been sold, but not totally paid for, until complete payment has been made. It may involve possession of the object until the debt is paid or it may be registered against the object (especially if the object is real estate). Ultimately, a lien can be enforced by a court sale of the property to which it attached and then the debt is paid off from the proceeds of the sale

Lien Release

A written document from the contractor to the owner that releases the Lien, Mechanic’s or Material following its satisfaction.

Lien Release Bond

A bond to release a recorded mechanic’s lien.

Lien Waiver

A written document from a contractor, subcontractor, material supplier or other construction professional(s), having lien rights against an owner’s property, relinquishes all or part of those rights.  Lien waivers are generally used for processing progress payments to prime or main or subcontractors as follows: Conditional Lien Waiver, Unconditional Lien Waiver, and Final Lien Waiver

Limited Liability Corporation, (L.L.C.)

An LLC is a hybrid between a partnership and a Corporation in that it combines the "pass-through" treatment of a partnership with the limited liability accorded to corporate shareholders. LLC members are not personally liable for the LLC's debts and obligations. The LLC limited liability umbrella does not, however, protect members from every type of liability that could rain down on them. LLC members may still be personally liable for LLC debts if they personally guarantee those debts. They are also still personally liable for their own negligence. But the liability exposure that remains after an LLC is formed does not prevent LLC’s from being an attractive business entity. LLC members are liable only up to the amount of their capital contributions and the amount they agree to contribute to the firm's capital.

Limited Partner

An owner in a limited partnership who’s liable only up to the amount of money invested.

Limited Partnership

A partnership with two kinds of partners: limited partners, who provide financial backing and have little role in management and no personal liability, and general partners, who are responsible for managing the entity and have unlimited personal liability for its debts.

Line of Credit

Financial institutions offer this to some customers. It allows the customer to borrow up to a certain amount of money without applying for another loan.

Liquidated Damages

In a construction context, liquidated damages are damages specified in a contract to be paid in the event of an unexcused delay.  Liquidated damage clauses, to be enforceable, must not be written to penalize, but as a reasonable approximation of the probable loss that will be caused by delayed performance.  An additional requirement is that the actual damages caused by delay would be difficult or impossible to determine.

Little Miller Acts

Statutes in all fifty states and the District of Columbia require performance and payment bonds for state government construction contracts. These state statutes often are called “Little Miller Acts” because many of them are modeled after the federal Miller Act. The “Little Miller Act” for Texas is Section 2253 of the Government Code, the codification of a law originally known as the McGregor Act.

Look See Money

Money spent by the surety to finance the principal while the surety is investigating a default or potential default and analyzing its options.

Loss Expense- Unallocated

Salaries and other expenses incurred in connection with the operation of a claim department of an insurance carrier which cannot be charged to individual claims

Loss Expense-Allocated

Handling expenses, such as legal or independent adjuster fees, paid by an insurance company in settling a claim which can be definitely charged to that particular claim.

Loss Ratio

Fraction calculated by dividing the amount of surety losses by the amount of surety premiums, expressed as a percentage of the premiums. Various bases are used in calculating the loss ratio

Lump Sum Agreement

See Stipulated Sum Contract.

Maintenance  Bond

Bonds that provide for the upkeep of the project for a specified period of time after the project is completed. These bonds guarantee against defective workmanship or materials. These bonds may occasionally include a guarantee of "efficient or successful operation" or other obligations. Two years is a common term for a construction bond.

Maintenance Bonds

Bonds that provide for the upkeep of the project for a specified period of time after the project is completed. These bonds guarantee against defective workmanship or materials. These bonds may occasionally include a guarantee of "efficient or successful operation" or other obligations

Manual Rate

The premium rate developed for a group's insurance coverage from the company's standard rate tables normally referred to as its rate manual or underwriting manual.


A person who supplies building materials for a construction or repair project. A more general word is "supplier”

McCarran-Ferguson Act

A federal statute passed in 1945 declaring that continued regulation and taxation by the states of the business of insurance is in the public interest. The act exempts the business of insurance from federal antitrust laws to the extent that there is state regulation. The law does not provide an antitrust exemption for acts of boycott, coercion or intimidation. (15 USCS §§ 1011-1015)

McGregor Act

The popular name of the original law establishing the requirements for bonds on public projects in Texas and establishing procedures for perfecting mechanic’s bond claims on such projects in Texas. It has since been amended several times and codified as Chapter 2253 of the Texas Government Code.

Measured Mile Analysis

A "measured mile" analysis compares the productivity of a period that has been impacted by a negative condition or event to the productivity of similar work under normal, un-impacted conditions. The theory is that the difference between a contractor’s actual inefficient productivity and an identified normal productivity is the amount of excess cost to the contractor as a direct result of labor inefficiencies and loss of productivity.

Mechanic’s Lien

A legal claim placed on real estate by someone who is owed money for labor, services or supplies contributed to the property for the purpose of improving it. Typical lien claimants are general contractors, subcontractors and suppliers of building materials. A mechanics' lien claimant can sue to have the real estate sold at auction and recover the debt from the proceeds. Because property with a lien on it cannot be easily sold until the lien is satisfied (paid off), owners have a great incentive to pay their bills.


The most popular form of alternative dispute resolution (ADR), mediation involves the appointment of a mediator who acts as a facilitator assisting the parties in communicating, essentially negotiating a settlement. The mediator does not adjudicate the issues in dispute or to force a compromise; only the parties, of their own volition, can shift their position in order to achieve a settlement. The result of a successful mediation is called a "settlement." Compare with arbitration.

Mediator’s Proposal

A good mediator will not let the parties simply walk away without trying to come up with some alternatives. At the point of impasse, the mediator may make a proposal to settle the case. The proposal would be presented confidentially to each side and only the mediator would know whether it has been accepted by all parties. That way, neither side is punished for making a big move at the end. One side will only know the other made the move if the case settles.

Miller Act

Miller Act - A 1935 statute mandating surety bonds on all federal public works contracts in excess of $100,000. State and local public works projects are protected by "Little Miller Acts."


An ADR procedure wherein a retired or sitting judge hears an abbreviated presentation of the evidence and renders a non-binding judgment on liability, damages, or both.

Miscellaneous Bonds

A term used to refer to bonds which do not fit any of the other well-recognized categories of surety bonds.

Mitigation of damages

A person who sues another for damages has a responsibility to minimize those damages, as far as reasonable. For example, in a wrongful dismissal suit, the person that was fired should make some effort to find another job so as to minimize the economic damage on themselves

Modified Total Cost Method

A method of proving damages that focuses on the impacted work activities and adjusts the original estimate to remove mistakes, inaccuracies, and work items not affected.

Narrow Form indemnity

See, Indemnity Clauses


See, National Association of Surety Bond Producers

National Association of Surety Bond Producers

The National Association of Surety Bond Producers is an organization of over 500 independent insurance agencies and brokerage firms that specialize in providing surety bonding and insurance programs to construction contractors. Most NASBP member firms also offer expertise in commercial and miscellaneous surety bonding as well.
NASBP is committed to strengthen professionalism, expertise and innovation in the surety industry and to advocate its use worldwide.


Not only are people responsible for the intentional harm they cause, but their failure to act as a reasonable person would be expected to act in similar circumstances (i.e. "negligence") will also give rise to compensation. Negligence, if it causes injury to another, can give rise to liability under tort. Negligence is usually assessed having regards to the circumstances and to the standard of care, which would reasonably be expected of a person in similar circumstances. Everybody has a duty to ensure that their actions do not cause harm to others. Between negligence and the intentional act there lies yet another, more serious type of negligence which is called gross negligence. Gross negligence is any action or an omission in reckless disregard of the consequences to the safety or property of another. See also contributory negligence and comparative negligence


Process where parties directly exchange ideas, views, promises, and problems surrounding a dispute. Positional bargaining tends to focus on demands, and counter-demands of disputing parties, sometimes leading to a bargaining process where parties trade concessions and demands. Interest-based negotiations focus on the interests underlying one's position on an issue. The parties explore their needs, concerns, and eventually work on developing mutually acceptable solutions that meet as many of the disputants' interests as possible.

Net Quick Assets

The difference between allowable current assets and changeable current liabilities. This figure is referred to as the working capital. A contractor must have adequate working capital in order to be bonded.

Net Worth

The amount by which assets exceed liabilities. It is of concern to bond indemnifiers in determining the size of a job a contractor can handle.

No Damage for Delay Clause

A contract clause that provides that, in the event of a delay, the delayed party will be compensated only with an extension of time, but no monetary compensation.

Non-admitted Insurance Company

An insurance company not licensed to do business in a particular state; such a company may sell excess and surplus insurance in the state if admitted insurers decline to write a risk.

Notary Public

A public officer with authority to certify signatures and statements, usually in connection with the transfer of real and personal property or agreements. In some states, the requirement to be a notary public may include specialized training, such as a law degree. In others, such as Texas, it requires little more than a filing fee and a small bond to assure the performance of the notary’s duties.


The person who is to receive the benefit of someone else's obligation; that "someone else" being the obligor. Also called a "promisee." In the surety context, this is the person or entity (often, the owner) to whom the principal (the obligor contactor) and the surety (the bonding company) owe their obligations.


See, Principal. The party primarily bound by the obligation.

Occurrence policy

A liability insurance policy that covers claims arising out of occurrences that take place during the policy period, regardless of when the claim is filed.


A deduction; a counterclaim; a contrary claim by which a given claim may be reduced or cancelled.

Overpayment Defense

Improper payment of contract funds by the obligee is a defense which rarely allows the surety to obtain a full discharge but which often allows the surety to reduce pro tanto the cost of its performance obligation. Under most types of bonds, the surety’s obligation to perform is conditioned upon the obligee having fully performed its obligations under the bonded contract. One of the obligee’s primary obligations is to release payments to the principal in accordance with the terms of the contract. To the extent that the obligee fails to fulfill its contractual obligations by improperly releasing payments to the principal, the surety is entitled to be partially discharged. The extent of the surety’s discharge may depend upon the surety’s ability to demonstrate an actual injury as a result of the obligee’s overpayment.


A list of persons, arbitrators, or judges selected to decide a specific case; a list of potential neutrals from which a selection is to be made


Partnering is a construction industry dispute avoidance technique that attempts to establish a working relationship among all team members based on cooperation and teamwork and achievement of mutual goals and objectives. Partnering is a concept that every contract has an implied covenant of good faith and fair dealing, and through the exercise of that agreement, the stakeholders strive to create a synergy of purpose to solve problems for the good of the project. 


A business organization in which two or more persons carry on a business together. Partners are each fully liable for all the debts of the enterprise but they also share the profits exclusively. Many states have laws which regulate partnerships and may, for example, require some form of registration and allow partnership agreements. One of the basic advantages of partnerships is that they tend to allow business losses to be deducted from personal income for tax purposes.

Pay If Paid Clause

See, Contingent Payment Clause.

Pay When Paid Clause

General contractors sometimes use pay-when-paid clauses in an attempt to avoid the cash flow problems that can arise when they're forced to pay subcontractors before receiving payment from the owner. Under such a clause, the subcontractor agrees not to be paid for his or her work until the contractor is paid by the owner (e.g., "Subcontractor shall be paid within seven (7) business days after General receives payment from Owner for Subcontractor's work"). Unless the contract expressly states otherwise, most courts interpret pay-when-paid clauses only to restrict the timing of payment to the subcontractor, and not to prevent payment altogether. (If the owner fails to pay, the clause will most likely be interpreted to require payment of the subcontractor within a "reasonable time.") Generally, a pay-when-paid clause does not prevent payment unless it clearly states that payment by the owner is a "condition precedent" to payment of the subcontractor. This type of provision is sometimes called a "pay-if-paid clause."

Payment Bond

A bond to assure payment of a contractor’s obligations to its subcontractor’s and suppliers. Payment bonds are usually required on public works projects and often required on private projects. The principal’s and surety’s obligations under the bonds may be determined by statute (“statutory bonds”) or by the wording of the bond itself (“common law bonds”).

Penal Sum

The face amount of a performance or payment bond, usually an amount equal to the amount of the underlying contract. If there are separate performance and payment bonds, there are two penal sums available.  This is the maximum amount the surety would be required to pay in the event of a default. Also called the bond “penalty”

Performance Bond

A performance bond guarantees the owner that the principal will complete the contract according to its terms including price and time. The owner is the obligee of a performance bond, and may sue the principal and the surety on the bond. If the principal defaults, or is terminated for default by the owner, the owner may call upon the surety to complete the contract. Many performance bonds give the surety three choices: completing the contract itself through a completion contractor (taking up the contract); selecting a new contractor to contract directly with the owner; or allowing the owner to complete the work with the surety paying the costs. The penal sum of the performance bond usually is the amount of the prime construction contract, and often is increased when change orders are issued. The penal sum in the bond usually is the upward limit of liability on a performance bond. However, if the surety chooses to complete the work itself through a completing contractor to take up the contract then the penal sum in the bond may not be the limit of its liability. The surety may take the same risk as a contractor in performing the contract.

Performance Specifications

The written material containing the minimum acceptable standards and actions, as may be necessary to complete a project. Including the minimum acceptable quality standards and aesthetic values expected upon completion of the project.

Personal Indemnification

If the principal is a closely held corporation or partnership, the individual owners and their spouses may be asked to personally indemnify the bond. Personal indemnification demonstrates the principal's personal commitment to the business entity and to the surety company.

Personal Surety

A person who acts as surety for another, who may or may not charge a fee for his or her guarantee. Personal sureties are generally not subject to licensing requirements like corporate sureties, but may be subject to some minimum regulation.

Power of Attorney

An instrument authorizing another to act as one's agent or on one's behalf. The person authorized need not be a lawyer, but is referred to as an “attorney in fact.”

Preconstruction Services

A range of activities performed by a contractor prior to execution of construction, including value engineering, constructability,  cost and schedule studies, procurement of long lead time items, and staffing requirements.

Pre-dispute ADR Contract Clause

A clause included in the parties' business agreement to specify a method for resolving disputes that may arise under that agreement. It may refer to one or more ADR techniques, even naming the third party that will serve as an arbitrator or mediator in the case. Pre-dispute agreements requiring arbitration of consumer disputes, or entered into as a condition of employment, have generated substantial backlash lately from people who argue that these clauses are adhesion contracts.

Preferred Stock

If you own this higher class of stock, you get your dividends before common stockholders. If the company folds, you also get assets before common stockholders do. The one thing you usually don't have is voting rights.

Preferred Surety Bond Program

PSB (also known as Plan B), a program administered by the Small Business Administration. Provides incentives to encourage underwriters to provide surety coverage for small, minority-owned and woman-owned contractors.


A rigorous review performed by the surety to certify that a contractor is capable of performing the work in accordance with the terms and conditions of the contract.

Pre-qualification of prospective bidders

A screening process wherein the owner or his/her appointed representative gathers background information from a contractor or construction professional for selection purposes. Qualifying considerations include competence, integrity, dependability, responsiveness, bonding rate, bonding capacity, work on hand, similar project experience, and other specific owner requirements.


In the surety context, the person or entity which has undertaken the primary obligation ( the contractor on a construction contract) which is bonded.


Privity of contract exists among those persons who actually took part in making the deal. These persons have special rights and duties because of their privity, including the right to enforce the contract. For example, a manufacturer and a seller may be "in privity," but not the manufacturer and an ultimate buyer.

Pro Forma Income Statement

A statement of revenue and expenses that includes some hypothetical values. It shows what could be expected to happen if a corporation decided to go through with a takeover, for example.


The term commonly applied to an agent, solicitor or other person who sells insurance or bonds, producing business for the company and a commission for himself.

Professional Liability Insurance

See Errors & Omissions Insurance.

Project Neutral

See, Standing Neutral

Promissory Estoppel

The principle that when Person A makes a promise and expects Person B to do something in reliance upon that promise, then Person B does act in reliance upon that promise, the law will usually help Person B enforce the promise because Person B has relied upon the promise to his or her detriment. Person A is "estopped" from breaking the promise even when there is no consideration to make the promise binding as part of a contract.

Prompt Payment Act

A law enacted in order to ensure that companies transacting business with the Government, or who are involved in the construction process, are paid in a timely manner.

Property Code Bond

A payment bond written in favor of a private project owner in the State of Texas. Such bonds are governed by Subchapter I of Chapter 53 of the Texas Property Code. Payment bonds written to private owners in Texas will be construed to be written in accordance with the Property Code whether the Code Sections are referenced or not, and irrespective of inconsistent terms in the bond form.

Property Insurance

Insurance providing financial protection against the loss of, or damage to, real and personal property caused by such perils as fire, theft, windstorm, hail, explosion, riot, aircraft, motor vehicles, vandalism, malicious mischief, riot and civil commotion, and smoke.

Proportional (Pro Rata) Reinsurance

A form of reinsurance which obligates the ceding company automatically to cede and the reinsurer automatically to accept a share of risk in accordance with a “treaty” agreement.  The two main types are “surplus” and “quota share.” Under a Surplus Liability Treaty, the reinsurer accepts only the surplus liability in excess of a predetermined limit and the reinsurer’s loss participation in the entire loss is in proportion to its share of the total coverage limit. Under a Quota Share Treaty, the primary company cedes and the reinsurer assumes a fixed percentage of every risk in the class of business defined in the treaty.

Punitive Damages

Special and highly exceptional damages ordered by a court against a defendant where the act or omission which caused the suit, was of a particularly heinous, malicious or highhanded nature. Where awarded, they are an exception to the rule that damages are to compensate not to punish. The exact threshold of punitive damages varies from jurisdiction to jurisdiction. In some countries, and in certain circumstances, punitive damages might even be available for breach of contract cases but, again, only for the exceptional cases where the court wants to give a strong message to the community that similar conduct will be severely punished.

Quia Timet

A Bill Quia Timet is an equitable proceeding used to guard against possible or prospective injuries and the preserve the means by which existing rights are protected from future or contingent violations. It differs from an injunction, which corrects past and present - or imminent and certain – injuries. This type of action might be filed by a surety to protect its interests in advance of an actual default.


The price for $1,000 of insurance or surety coverage, usually in one year, expressed in dollars and cents

Ratification Agreement

As soon as the surety begins to seriously entertain selection of the takeover option, it will take steps to protect against inflating completion costs. In many instances, most of the bonded work will actually be performed by subcontractors and a significant portion of the overall contract price will relate to materials furnished by  suppliers. The surety will negotiate agreements with the subcontractors and suppliers to the bonded principal, offering prompt payment in return for a commitment to continue performance at the prices originally offered to the principal. This practice has been termed as the "ratification process.” Essentially, the surety binds itself to make payment to a given subcontractor or supplier in consideration for that supplier's separate agreement to perform its portion of the bonded work in accordance with its prior agreement with the principal. the ratification agreement typically provides for the surety's right to assign the agreement to a replacement contractor. Similarly, termination provisions are usually included should the surety elect not to complete the work. Finally, the agreement will provide for an assignment to the surety of all of the subcontractor's or supplier's claims against the principal, to the extent of the consideration given by the surety under the agreement.


Giving to the policy holder or principal some part of the premium, agent’s commission, or something of value as an inducement to buy. Rebates are not allowed under many insurance laws unless they are approved under a rate filing.

Registered Agent

Virtually every state requires all corporations and limited liability companies (LLC) to appoint a Registered Agent. Most states require the Registered Agent to be physically located in the state of incorporation or qualification. If you fail to appoint a Registered Agent, then the state will take steps to prevent you from being able to do business in that state. A Registered Agent is an entity that is responsible for receiving important legal and tax documents for your corporation or LLC, which may include: notice of litigation (service of process), franchise tax forms and annual report notices. Your Registered Agent address is a matter of public record. Each state wants to make sure that its citizens and businesses have a way to contact you in the event they have a potential claim against you. Without a Registered Agent to receive legal process on your behalf, you could be defaulted for failing to answer the claim in a timely fashion.


Acceptance by one insurer (the reinsurer) of all or part of the risk or loss underwritten by another insurer (the ceding insurer).


A document by which a claim or right is relinquished. It is prudent to get a release in exchange for making final payment to a contractor.


Funds that are earned by the contractor but not paid until some agreed upon date, such as the completion of the job. These funds, usually 5 to 10% of the contract amount are retained for a variety of reasons; as an incentive to complete the job in a timely manner, or as a fund for the benefit of suppliers and subcontractors.

Retrospective Rating

Rating procedure which allows adjustment of an insured's final rate on the basis of the insured's own loss experience

Return on Net Worth

A financial ratio that measures the profit return on the investment , the reward for the assumption of ownership risk

Sales to Working Capital

A ratio of annual revenue to working capital that measures to what extent the company's sales volume is supported by the working capital.


The property in which an insurance company secures an ownership interest as a result of paying a claim for total loss or damage based on the true value of the property in its undamaged state or before the loss occurred.

Savings Clause

In a dual obligee rider, the savings clause requires the additional named obligee to fulfill the contractual obligations of the contract in order to invoke the performance features of the bond.


An acronym for the Small Business Administration. The SBA has a program to help small and minority owned contracting businesses obtain surety bonds.

Scope of Authority, Agent’s

Performance of duties which were expressly or impliedly assigned to the agent by the principal.

Settlement Agreement

In a civil lawsuit, the document that spells out the terms of an out-of-court compromise.

Severability Clause

A provision that keeps the remaining provisions of a contract or statute in force if any portion of that contract or statute is declared void or unconstitutional.

Shareholder Agreement

A contract between the shareholders of the company and the company itself, in which certain things, usually the purview of the board of directors, are detailed. For example, a shareholder might be allowed to manage the company, instead of a board of directors. The shareholder agreement will also, typically, control inflows to the company (purchase of shares), how profits are to be distributed, dispute resolution and what to do if a shareholder dies.

Silent Joint Venture

See also, Joint Venture. A silent joint venture involves an undisclosed venture partner.

Silent Partner

A person who invests in a company or partnership but does not take part in administering or directing the organization; he or she just shares in the profits or losses.

Soft Costs

Soft Costs are cost items in addition to the direct Construction Cost. Soft Costs generally include architectural and engineering, legal, permits and fees, financing fees, construction Interest and operating expenses, leasing and real estate commissions, advertising and promotion, and supervision.

Soft Market

That part of the insurance sales cycle in which competition is at a maximum as insurance companies use their excess capacity to sell more policies at lower prices. See also Hard market.

Sovereign Immunity

The government's freedom from being sued. In many cases, the U.S. government has waived immunity by a statute such as the Federal Tort Claims Act

Spearin Doctrine

The federal courts have created a doctrine whereby an owner impliedly warrants the information, plans and specifications which an owner provides to a general contractor. This doctrine, entitled the Spearin doctrine, arises from the case of United States v. Spearin, 248 U.S. 132 (1918), and maintains that a contractor will not be liable to the owner for loss or damage which results solely from insufficiencies or defects in such information, plans and specifications.

Standing Neutral

A construction dispute avoidance technique involving the selection of a third party, often one or more industry professionals or contract/claims experts, to serve the parties as an observer, fact finder and dispute resolver. Sometimes called a “project neutral,” the standing neutral provides ongoing dispute prevention services, reviews and assesses disputes, conducts neutral fact-finding and efficiently and economically guides the parties through the resolution process.

Status Inquiry Letter

Most surety companies routinely send out job status inquiries obligees to monitor the progress of the contracts they have bonded. Sureties are keenly interested in the progress of work on bonded projects. It is not practical, or even physically possible, to visit all bonded jobs on a regular basis, so the job status inquiry is the next best thing. Most of the time, the responses to these inquiries report satisfactory performance. In those situations where that is not the case, however, they can be an early warning of a looming problem. When a surety is notified of a problem early on, it may be in a position to help the subcontractor and prevent the problem from becoming a major disaster. Principals may be reluctant to inform the surety about a problem for fear of that knowledge resulting in a curtailment of their surety credit. Thus, the job status inquiry gives the obligee a reasonable means of communicating with a principal’s surety. Principals should keep in mind that the obligee has a right, and in some cases, a duty, to communicate with the surety about unsatisfactory performance.

Statute of Limitations

A law that sets a maximum amount of time after something happens for it to be taken to court, such as a "four-year statute" for lawsuits based on a contract, or a "one-year statute" for a claim on a payment bond claim.  These statutes vary from state to state.

Statute of Repose

Sometimes called “completion statutes,” a statute of repose is an outside date, typically running from the date of completion of a project, after which parties involved in a construction project would have no further liability. Statues of Repose arose to deal with the difficulties in determining when a cause of action arose, and was therefore barred by a statute of limitations, because of discovery of defects many years after project completion.

Statutory Retainage

Retainage required to be withheld by an owner from a prime contractor. In Texas, an owner is required to retain 10% from each progress payment to a general contractor, and to hold that retainage until 30 days following final completion of the project. General contractors furnishing Property Code bonds are exempt from this statutory requirement. There is no requirement for retainage on Public Works in Texas, and statutes mandate that interest be paid by the public owner if retainage exceeds 5% of the contract amount in certain circumstances.

Step or Multi-Step Dispute Resolution

Parties may agree, either when a specific dispute arises, or earlier in a contract clause between business venturers, to engage in a progressive series of dispute resolution procedures. One step typically is some form of negotiation, preferably face-to-face between the parties. If unsuccessful, a second tier of negotiation between higher levels of executives may resolve the matter. The next step may be mediation or another facilitated settlement effort. If no resolution has been reached at any of the earlier stages, the agreement can provide for a binding resolution through arbitration, private adjudication or litigation.

One form of multi-step ADR is the wise man procedure, typically used when problems arise in long-term partnerships such as those in the oil and gas industry. Sometimes called "progressive negotiation" or "mutual escalation," this procedure refers matters first to a partnership committee which oversees the day-to-day operations of the project. If the problem cannot be resolved at that level, the wise-man option the next ADR step is employed.

The wise men (or women) are respected senior executives of each company who are uninvolved in the project. These officials are given a fairly short time frame (sometimes just 30 days) to investigate the dispute. If that fails, the matter goes to a third step, usually binding arbitration. While pioneered in the oil industry, the wise man approach could also be useful in the high-technology field and other areas involving close and continuing business relationships.

Stipulated Sum Contract

An agreement in which a specific amount is set forth as the total payment for performance of the contract. See, lump sum contract.

Stop loss (excess of loss ratio)


A form of protection which makes it possible to limit the loss ratio on a year of account to an agreed percentage of the original insured's premium income on business protected. Personal stop loss reinsurances are also used by individual members to obtain a measure of protection against an overall underwriting loss on any one year of account.

Subcontract Bond

A bond required by a General Contractor of a Subcontractor, guaranteeing that the subcontractor will fully perform the subcontract in accordance with the terms and will pay for certain labor and material incurred in the prosecution of the subcontracted work.

Subcontractor Default Insurance

See, Contractor Default Insurance

Subdivision Bond

A bond running to a city, county or state to guarantee the principal will finance and construct certain improvements such as streets, sidewalks, curbs, gutters, sewer, lift stations, and drainage systems.


The right of a surety, in its name or in the name of the obligee under a bond, to pursue a course of action against the principal or any other party liable for a loss paid by the surety.

Substantial Completion

Unless a contract provides a different definition, substantial completion is generally understood to occur when a project is sufficiently complete to allow it to be used for its intended purpose, despite some work still needing to be done (such as work enumerated on a punch list.)

Summary Judgment

A final decision by a judge that resolves a lawsuit in favor of one of the parties. A motion for summary judgment is made after discovery is completed but before the case goes to trial. The party making the motion marshals all the evidence in its favor, compares it to the other side's evidence, and argues that a reasonable jury looking at the same evidence could only decide the case one way--for the moving party. If the judge agrees, then a trial would be unnecessary and the judge enters judgment for the moving party.

Summary Jury Trial

An ADR procedure wherein each side puts on an abbreviated summary of its case to six jurors selected from the jury roster. The jurors do not know and are not told that their verdict on liability and damages is purely advisory. The premise behind this ADR method is that the parties get a glimpse of what a jury might do in their case.

Supplementary Conditions

A written section of the contract documents supplementing and qualifying or modifying the contracts general conditions.

Supply Bond

Bonds which guarantee performance of a contract to furnish supplies or materials. In the event of a default by the supplier, the surety indemnifies the purchaser of the supplies against the resulting loss.


A properly licensed firm or corporation willing to execute a surety bond, or bonds, payable to the owner, securing the performance on a contract either in whole or in part; or securing payment for labor and materials.

Surety Association of America

The Surety Association of America (SAA) is a voluntary, non-profit, unincorporated association of companies engaged in the business of suretyship.   It presently has approximately six hundred member companies which collectively underwrite the overwhelming majority of surety and fidelity bonds written in the United States. The Surety Association of America is licensed as a rating or advisory organization in all states, as well as in the District of Columbia and Puerto Rico, and it has been designated by all state insurance departments except Texas as a statistical agent for the reporting of fidelity and surety experience. The Surety Association of America represents its member companies in matters of common interest before various federal, state and local government agencies.

Surety Credit

Contractors qualify for surety credit following an analysis of their financial statements, integrity and abilities by the surety underwriter. The line of surety credit is usually stated in terms of largest single job that the surety will underwrite and the total work program (bonded and un-bonded) that the surety will support.

Surety Credit

Contractors qualify for surety credit following an analysis of their financial statements, integrity and abilities by the surety underwriter.

Surety Information Office

The Surety Information Office (SIO) is the information source on surety bonds. SIO was formed in 1993 to disseminate information about the benefits of contract surety bonds in public and private construction. SIO is supported by the National Association of Surety Bond Producers (NASBP) [member agents and brokers]and The Surety Association of America (SAA) [member surety companies]. SIO's mission is "to increase the use of contract surety bonds in the private sector, and foster dissemination of positive information on the important role of corporate suretyship in public and private construction." SIO works closely with a network of 46 Local Surety Associations (LSA) nationwide. Many of these Associations have formed Public Information Task Forces to educate audiences on how surety bonds are used in construction to prevent contractor default.

Surety Support Programs

A Surety Support or Mentor/Protégé program offers program participants, usually small and disadvantaged businesses, the ability to complete projects as a better, more sophisticated firm, capable of tackling larger projects in the future. The goal is to help the firms get approved for surety bonds and thus create a bond track record for them, which is important for their future projects. The mentoring process may include training in areas such as accounting, financial management, surety, and safety.

Surety Technical Assistance Services

A type of surety support program mandated by the General Services Commission of Texas.

Surety Underwriter

An employee of the surety company who evaluates applications for surety bonds and determines the terms under which the applicant will be bonded.

Surplus Lines

Coverage procured in an unlicensed or non-admitted insurance company because of its unavailability in the licensed and admitted market.

Sworn Statement

A statement given under oath; an affidavit.

Takeover Agreement

The "takeover" agreement, whereby the surety binds itself to continue performance of the bonded contract, is the management tool utilized by the surety in executing the option. Regardless of the particular method of completing the work, i.e. whether by awarding a lump sum, "cost plus" or construction management completion contract, the takeover agreement is the vehicle used by the surety in making its determination as to what is to be done for the obligee, how fast it is to get done, and what the surety will receive in return for doing it.

Takeover by Surety

The takeover option occurs whenever a surety, upon default of its principal, enters into an agreement, or by its conduct agrees to "take over" the remaining performance obligations of its principal. Similar to selection of the financing option, the surety contemplating a takeover of the bonded work is confronted with a myriad of concerns:  (1) preservation of its bond penalty ; (2) preservation of its indemnity rights in the face of its principal's protestations concerning the costs being incurred to complete the work; (3) dealing with uncooperative owners and vendors to its principal; (4) holding down the continuing expense of administering completion; (5) the pressing time constraints of delay damage assertions; and (6) the timely collection of the available contract funds and retainages. The principal advantage afforded by the takeover option is the control afforded to the surety over its potential loss. Presumably, the surety will select a replacement contractor(s) with greater present capabilities than the principal. Further, to the extent the replacement contractor undertakes the obligations of the bonded contract, for a fixed price, the surety is able to fix its loss.

Tender Option

When a default termination occurs at an early stage of the project, the surety may consider tendering a sum of money to the obligee in full and final settlement of all claims.


Generally, the process of terminating a contract, usually as the result of the default of one of the parties.

Termination for Convenience

Termination, usually pursuant to a contract clause, or by agreement of the parties after the execution of a contract, which is not for cause or default, but for the convenience of one of the parties.  When a contract is terminated for convenience, the contractor is usually paid for the value of the work performed and some portion of his earned or anticipated profit and overhead.

Three C's

All applicants for Surety bonds must meet the underwriting standards for what are often referred to as the "Three C's": Character: applicant's standing and reputation are such to warrant the conclusion that they are of good character and worthy of trust; Capacity: if the obligation entered into by the applicant requires particular skills or ability in its performance, the applicant should possess those necessary skills and ability; and  Capital:  the applicant should be solvent and would be unlikely to commit dishonest act or perform inefficiently because of strained financial resources.

Time is of the Essence

A phrase used in a contract to make timeliness of performing a contractual promise material, thus making a failure to do what is required by the time specified a breach of the contract.

Total Cost Method

A method by which a contractor seeks to prove its damages by comparing the costs of performance with what the contractor contends should have been the cost of the project. Compare to Modified Total Cost Method

Treasury List

The Department of the Treasury maintains a list of corporate sureties approved to issue bonds for federal projects, Treasury Department Circular 570. Copies may be obtained from the agency. The circular also is posted in the Treasury’s computerized bulletin board at (202) 874-6817, and on Treasury’s Web site at http://www.ustreas.gov Whenever a new corporate surety is added to the approved list, a notice is published in the Federal Register. Contracting officers are prohibited from accepting surety bonds issued by corporate sureties not listed in Treasury Circular 570. The circular lists the name and address of each approved surety and all states where each surety is licensed.

Trust Fund Statute

Chapter 162 of the Texas Property Code declares construction payments and loan receipts for improvement of real property trust funds and provides for certain penalties for the misapplication of such funds.

Unit Price Contract

A contract which provides the owner pay the contractor a specified amount of money for each unit of work completed in the performance of a contract. Usually, this is used in situations where precise quantities cannot be predetermined.

Value Engineering

A design review process involving critical evaluation of elements of a building to determine the relative value to the owner of the specified product or system compared to alternative products or systems.  Life-cycle costing and constructability studies may be parts of the value engineering process.


When a person disclaims or renounces to a right that they may have otherwise had. Waivers are not always in writing. Sometimes a person's actions can be interpreted as a waiver.


An undertaking or stipulation that certain facts are as stated.

Workers' Compensation Insurance

Insurance against liability imposed on certain employers to pay benefits and furnish care to employees injured, and to pay benefits to dependents of employees killed in the course of or arising out of their employment.

Work-On-Hand Report

A type of financial statement or schedule which lists a contractor's jobs in progress.

Work-On-Hand Reports

A type of financial statements or schedule which lists a contractor's jobs in progress.

Wrap Up Insurance

One policy of insurance to cover all exposures on an entire project, usually purchased by the owner; more common on larger projects

X, C and U Exclusions

Exclusions to property liability forms aimed principally at contractors and excavators. The exclusions deny payment for loss due to Explosion ("X"), Collapse ("C") or Underground Damage ("U"). Explosion includes property damage arising from blasting or explosion. Collapse includes structural property damage and property damage to any other property rising out of grading of land, excavating, burrowing, filling or backfilling, tunneling, pile driving, or coffer dam or caisson work, or moving, shoring, underpinning, razing or demolishing any building or structure. Underground damage includes damage to wires, conduits, pipes, mains, sewers, tanks, tunnels, or any similar property beneath the surface of the ground or water caused by and occurring during the use of mechanical equipment for the purpose of grading land, paving, excavating, drilling, burrowing, filling, backfilling, or pile driving.

Z Score

A company failure or bankruptcy prediction method developed by Professor Edward Altman of New York University. A company's Z score is a positive function of five factors: (net working capital) / (total assets) (retained earnings) / (total assets) (EBIT) / (total assets) (market value of common and preferred) / (book value of debt) (sales) / (total assets). Although the weights are not equal, the higher each ratio, the higher the Z score and the lower the probability of bankruptcy.




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    Higdon Compton Insurance Agency
    Houston, TX
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Higdon Compton Insurance Agency specializes in surety bonds in Texas, construction bonds in Texas, court bonds in Texas, probate bonds in Texas, license and permit bonds in Texas, Auto Dealer Surety Bonds in Texas, Supersedeas Bonds in Texas, and all types of surety bonds.  Higdon Compton Insurance Agency is based in Texas, offering surety worldwide.