Posted: January 9th, 2023
When most attorneys inquire about the cost for an appeal bond, their question typically focuses around the annual premium that the surety company will charge. This is totally appropriate in most circumstances, but when the client is using cash as collateral to secure the bond, there is a second part of the equation to consider: interest on the cash.
Surety Companies Pay Interest on Cash
Many people are unaware that some surety companies pay interest on the cash they hold as collateral. The way it is structured varies from surety to surety. In some instances, the surety company will hold the cash in their trust account and accrue simple interest during the appeal. Other times, the surety will allow for the cash to be deposited in an approved third-party brokerage account and pledged to them where the client can invest in things like US Treasuries.
How Much Interest do Surety Companies Pay?
The amount of interest that surety companies pay varies by company and fluctuates over time with the interest rate in the market. It also depends on whether the surety is paying simple interest or if the client is investing the money themselves in the approved third-party brokerage account.
For the third-party brokerage account option, the best gauge is the 1-year US Treasury yield. According to the St. Louis Federal Reserve, the current yield is around 4.6% per year. This is a substantial increase from a year ago when US Treasury rates were less than 1%.
What is the Total Cost for an Appeal Bond Secured with Cash?
Premiums for bonds secured with cash generally decrease as the bond amounts get larger. Let’s assume a sample $1 million bond has a premium rate of 1.5%. This would come out to a premium of $15,000 per year. If the client invested in 1 year US Treasuries at the current 4.6% yield, the client would earn $46,000 in interest for the first year, which is more than triple the amount of the premium. The net gain in interest for the appellant after paying the bond premium would equal $31,000.
What is the Process for Putting Cash in Place with a Surety?
Putting cash in place to secure an appeal bond is quick and streamlined. If the cash is being held by the surety company, it is simply wire transferred to their account and the necessary paperwork outlining the terms that the collateral is being held and bond is being provided is then completed and signed.
The process is similar when using an approved third-party brokerage with the added step that the client needs to set up an account with the brokerage firm directly. This can take a few days to get processed, so if investing in US Treasuries is the path the client wants to pursue, it’s important to account for this bit of extra time required.
The rise in interest rates is helping appellants earn significantly more interest on cash deposits with surety companies. When structured well, this interest can more than offset the cost of the premium for the appeal bond, which for an appellant already facing a potential judgment and additional attorney’s fees, this can be a welcome set of circumstances.
At CSBA, we represent over 35 surety companies, and based on our experience in handling appeal bonds, we know which sureties offer the most attractive terms for appellants. However, please note that CSBA is not an investment advisor and any investment decisions or risks will be between the client and the investment brokerage firm.
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