The surety marketplace is cyclical with fluctuations that are driven by all facets of the economy–from main street construction to Wall Street banking. One area that has remained historically consistent, however, is the marketplace’s demand for court bonds, both judicial and fiduciary. Not surprisingly, though, in the wake of the worst economy since the great depression, the demand for court bonds today has shifted into another gear.

In 2009 and 2010, over 58,000 businesses declared bankruptcy; over 1.3 million individuals filed bankruptcy in 2009 and over 1.5 million filed in 2010. With the economy in such turmoil, more businesses and individuals are looking to the courts to protect and/or enforce their rights. The net result has become a significant increase in the demand for court bonds, providing surety professionals plentiful opportunities.

Of judicial bonds, the hottest right now are:

• Replevin
• Garnishment
• Attachment
• Appeal
• Injunction

Of fiduciary bonds, the hottest right now are:

• Trustee in bankruptcy (Reorganization or Liquidation)
• Receivers/trustees in equity courts (continuation of business)
• Assignee for the benefit of creditors

The fundamentals of writing court bonds are different for the agent and the underwriter. From an agent’s perspective, it is important to obtain and provide to the surety company all the relevant court filings that outline the history behind the case and outline the obligation. Additionally, the agent should know their principal and what indemnity is available, especially when dealing with a complex organization structure (i.e Private Equity). Finally, the agent should work to create a strong relationship with the principal’s attorney and ensure that all underwriting requirements are communicated accurately so the principal and their attorney completely understand the indemnity, any collateral provisions (i.e. how long it’s going to be held), and the rate structure.

From an underwriter’s perspective, rule number one is read all the court filings and acknowledge if any lack of understanding. Underwriters should reach out to their company’s home office underwriting team and/or legal department for assistance. Also, underwriters need to ensure that they understand who their principal is and where they exist with a larger organization. This goes to the heart of who is available to indemnify the surety and it makes sure that, if the underwriter has requested financial statements, the underwriter is looking at the indemnitor’s financial status and not a subsidiary or parent company that is not a party to their indemnity agreement. If the underwriter believes that they are going to require collateral, make known that possibility as early as possible so the agent can prepare the client. Underwriters need to ensure that they underwrite the bank that the principal intends to use; ensuring that the bank is strong and stable.

The above are some basic rules because some of court bond opportunities will be complex and merit much deeper underwriting. Just remember that collateral is not the “end all be all” when it comes to court bonds or any risk for that matter.

How do surety professionals find these opportunities?

Some of the best opportunities available for writing court bonds are with the paralegals, attorneys and law firms many of us already know. Access to legal professionals can be gained through a variety of sources:

• State and Local Bar Associations
• Paralegal Associations
• Fiduciary Forums
• Existing Law Firm Client within an Agency

In addition to attorneys and law firms, a good source of business for court bonds is small independent agencies that don’t have a professional surety department. Every city has agents that don’t understand surety bonds; contact them and let them know you have the expertise to assist their clients.

To learn more about court bonds, access the audio recording of the NASBP Virtual Seminar, titled “Understanding and Underwriting Court Bonds: Current Requirements and Opportunities,” held in March by clicking here.

The authors of this article are Christopher R. Gagno, Underwriting Manager at International Fidelity Insurance Co. in Maitland, FL, and Dale A. (Dedi) Belis, Surety Manager at Seitlin Property & Casualty in Miami, FL. They can be reached via e-mail at cgagnon@ific.com and dbelis@seitlin.com, respectively.