A Public Official Bond is a type of financial guarantee that protects the public against dishonest or fraudulent acts of certain government officials and the failure of those officials to perform their duties in an appropriate manner. While some public official bonds only guarantee the honest performance of duties, others guarantee performance of duties and protect against dishonest acts such as theft of public funds.
The public official who is appointed or elected is referred to as the Principal on the bond. As part of their duties, the public official must purchase a bond from a surety bond company or surety. In exchange for payment and indemnity from the official, the surety provides a financial guarantee to the government body who is referred to as the Obligee.
Should the public official fail to perform their duties, or commit a dishonest act, a claim can be made against the surety bond. The surety will make a payment to the obligee and may choose to seek reimbursement from the public official under the indemnity agreement.
There are three general types of public officials who need bonds. Administrative Officials, Public Fund Officials and Officials with Direct Involvement.
Administrative public officials are elected or appointed and need bonds. However, these individuals are only responsible for upholding their duties of office under the bond. They do not regularly handle money or public funds. Judges, coroners, certain school officers and others are considered administrative public officials. Bonds for these individuals are easily written. A claim on these bonds can occur when somebody performs an act negligently or outside of their duties. In practicality, sureties almost never have claims against this type of bond.
Public Fund Officials are those that are trusted to handle public money or other assets. Bonds for these officials guarantee both the performance of their duties and protect against fraud and theft of public funds. These bonds are much higher risk as many of these officials are held responsible even when losses are caused by others. Examples include losses caused by subordinates, robbery and careless actions. These officials may also be held liable if they fail to deposit funds into the correct financial institution or account. In some jurisdictions, they can even be held responsible if the financial institution fails through no fault of the public official.
Some public officials are directly involved with the public. Examples of these public officials include notary publics, sheriffs, deputies, and other law enforcement officers. These public official bonds protect the public from the officials' negligent acts or breach of their authority. Examples include wrongful arrest of the seizure of property. These bonds can be considered high risk with the exception of notary publics. Notary public bonds are written freely as they rarely have bond claims.
Public Official Bonds are written on either an individual basis or a scheduled basis.
Individual Public Official Bonds are bonds written for a single public official or office. These bonds can guarantee performance of duties, dishonesty, or both. These bonds will cover the public official or office for a specified amount.
Surety bond underwriters will want to know what the individual’s duties are, including if they are responsible for handling money. If money is handled, the bond company will often want to know what procedures are in place to prevent theft and dishonesty. Many public official duties are well defined and these bonds can often be obtained with just a credit check of the public official. Individual public official bonds do require the indemnity of the official. This means that if the surety suffers valid loss and pays a claim, the public official agrees to reimburse the surety.
Scheduled Public Official Bonds are used to cover multiple parties or positions. These bonds can be written to cover an entire office or group of people handling public funds. These bonds can be written on either a name schedule or a position schedule. The limit on the bond is usually the same for each person or position.
Underwriting Scheduled Public Official Bonds is different from individual bonds. While the bond company will collect much of the same information such as what controls are in place, the individuals themselves are not signing the application and indemnity agreement. Instead, the government office is the principal. However, the government office is also the obligee. This creates an interesting dynamic with the public. An example would be a sheriff’s department having a scheduled bond for its deputies to the county they serve. Should a claim occur, the department or county may be forced to absorb the claim.
The benefits of scheduled public official bonds include better costs, ease of obtaining and control over terms.
Surety bond underwriters can more efficiently write scheduled bonds for multiple people or positions. It takes less time and effort than underwriting each individual on their own. Bond companies generally pass these savings onto the customer, so pricing is often better for scheduled public official bonds than for individual bonds.
Schedule surety bonds underwrite the position and the controls in place. Since the individuals do not have to go through personal credit checks or financial underwriting, these scheduled public official bonds are often easier to obtain than having each individual qualify on their own. However, the surety underwriter should still underwrite each person or position as if they were qualifying for an individual bond in other aspects.
Because the public office is responsible for obtaining scheduled public official bonds, they have more control over the terms. This includes the amounts required for each position, and terms for each bond.
Surety bond underwriters need to look at many factors when underwriting public official bonds. However, the main considerations are the background and qualifications of the individuals holding office, the bond forms required, the responsibilities of the official and time in the office.
Underwriters will look at a person’s previous experience in determining whether they qualify for a public official bond. Have they previously handled money? Do they have experience in law enforcement or related experience? These are the types of questions bond underwriters must consider.
Bond forms are a key consideration when underwriting public official bonds. Most public official bond forms are dictated by law and statutes. In some cases, these forms may be outdated but the surety bond company does not usually have the ability to use their own bond forms. Therefore, they need to review the laws and bond form to ensure that they are comfortable with the requirements.
The responsibilities of the official are also an important underwriting consideration. Bond companies easily write bonds for those with only minor administrative duties. However, the higher up a government official, the more responsibilities they often carry. These bonds carry more risk for the surety.
Those that handle money also create additional risk for the surety company. The surety will want to know about the office’s procedures for handling money and related responsibilities. These include who have access to money, frequency of audits, separation of duties and other procedures for protecting the public money from embezzlement. The greater the internal controls and procedures, the easier it will be to obtain a public official bond.
In most jurisdictions, public official bonds cannot be canceled. They are written for the entire term of the official holding office. The longer the term, the more potential risk for the surety. Surety bond companies will be cautious about writing a public official bond mid-term. While it can happen, it is rare and the circumstances must be fully understood.
Public Official Bonds are priced based on the risk of the obligation. The pricing varies between 1% - 3% of the bond amount. Public Officials with administrative duties or positions with good controls and risk management can expect to pay less. Those in riskier positions, those with background issues or those with poor controls, should expect to pay more.
While public official bonds are easily obtained in most cases, there are certain things governments can do to make bonding easier and less expensive. These include obtaining proper insurance coverage, separation of duties and good internal controls.
Insurance coverage is critical for public officials. While public official bonds benefit the public, the limits often fall short of the actual damages. Having proper insurance coverage can significantly reduce the bond company’s exposure. For example, liability insurance can protect against third party damages and lawsuits. Errors and omissions insurance can protect against mistakes and negligence. Fidelity insurance coverage can protect against theft of public funds. All of these things reduce risk and encourage bond underwriters to put public official bonds in place.
Separating public duties is another best practice. For example, a town treasurer may be responsible for both tax collection and the town’s accounting. When possible, separate those types of duties that can lead to claims. While it may be impossible to separate those duties, having clearly defined responsibilities and bonding those responsibilities separately is a good practice.
Having good and well thought out controls in place is the best thing governments can do to reduce claims on public official bonds. These include training so that officials know their duties and responsibilities and regularly auditing those duties.
Public Officials Bonds are easy to obtain in most cases. Many individual public officials can be purchased online with a credit check. Contact the experts at Axcess Surety for help with scheduled bonds or more complicated risks. We have the people and bond companies who can help governments find the best terms and conditions.
Axcess Surety is the premier provider of surety bonds nationally. We work individuals and businesses across the country to provide the best surety bond programs at the best price.
