Evaluation Guideline:

Electronic Bonding Technologies

The Surety & Fidelity Association of America (“SFAA”) is a trade association consisting of over 590 surety companies that write the majority of surety bonds in the United States.  The National Association of Surety Bond Producers (“NASBP”) is an organization of over 500 independent insurance agencies and brokerage firms that specialize in providing surety bonding and insurance programs to construction contractors.  In recent years, bond obligees, particularly state departments of transportation, have implemented or considered the implementation of electronic bonding methodologies.  SFAA and NASBP support the electronic execution and filing of bonds.  Electronic processes yield benefits to all parties of the bond transaction, such as reduced processing costs and greater efficiency.  However, any electronic process must not lose sight of the fact that a bond is a contract and all necessary elements to ensure an enforceable contract must be preserved when the process moves from a physical to an electronic environment. 

The Bond Execution Process

A surety bond is a three party agreement whereby the surety guarantees that one party (the principal) will perform its obligations owed to another (the obligee).  Both the surety and the principal are liable to the obligee.  Therefore, both the surety and principal sign the bond.  When the bond is a paper document, the bond execution process generally follows the following steps:

• Surety agent completes the necessary information on the bond form.

• Surety agent sends the bond form to the principal.

• Principal signs the bond form.

• Principal submits the bond to the obligee.

An electronic methodology must translate these steps from the “paper world” to the “electronic world.” 

Electronic Bond Execution Process

A major interest to sureties is that bond obligees implement methodologies that are not restricted to a technology provided by a specific vendor.  Sureties desire the ability to choose the technology or vender that best meets its needs rather than be required to use a particular vender.  If sureties are to have a choice, it is crucial that competition is fostered and several vendors enter surety bond execution market.  SFAA and NASBP seek to assist vendors by providing guidance as to the special needs of sureties.  Specifically, in order to provide a useful bond execution technology, technology providers must be aware of the special needs of sureties relative to the bond execution process.  This guideline presents a checklist of those needs. 

Possible methodologies for bond execution are:

• Transmitting an electronic bond with digital signatures using secure messaging technology; and

 Checklist of Required Characteristics

Any electronic bonding methodology must possess certain essential characteristics.  These are:

• The filing process ensures the validity and nonrepudiation of all aspects of the bond transaction.

• Permits the signing by two or more different parties at different points in time.

• Provides assurance to obligee that, aside from its signature, principal has not altered the bond transaction.    

• Ensures the identity and authority of the surety’s attorney-in-fact by incorporating or allowing the incorporation of unalterable electronic powers of attorney, which must be granted by the surety.

• The electronic bond transaction can be stored and retrieved freely by all parties.[1]

• The bond transaction must be stored in a secure manner and transmitted using 128 bit encryption to avoid repudiation and tampering. 

The following are suggested characteristics:

• Uses ACORD data standards.

• Integrates with the variety of systems and processes of the various parties involved in the bond transaction. 

• Permits the use of a trusted third party to certify the delivery and signature.

SFAA and NASBP staffs are willing to meet and discuss these characteristics with any vendor interested in serving the surety bond market.