When clients and attorneys call around to various insurance agents in search of an appeal bond, they are often told that 100% collateral is required. While this is often the case, there are some important exceptions that are important to be aware of.
Before getting into those exceptions, it’s important to understand how surety bonds are underwritten by surety companies. Unlike regular insurance products where insurers expect a certain number of losses and charge premiums that are sufficient to cover those anticipated losses, surety companies underwrite appeal bonds on the basis that there will be no losses. The premiums that surety companies charge are generally not sufficient to cover the losses, and as a result, they require the appellants obtaining the bonds to indemnify them against losses. This is very different from insurance where the insured doesn’t typically agree to pay back losses to the insurer, which is why surety is often compared more to banking and loan products.
Since most appeals are not successful, it means there is a high likelihood that the judgment will not be reversed and there will be a claim against the bond. That being the case, surety companies require a high degree of certainty that the appellant will be able to pay the judgment on their own. This can be especially challenging for a surety company considering the appeal may take several years during which time a lot can change. In situations where surety companies cannot reliably determine the appellants’ future ability to satisfy the judgment, they will require collateral. To learn more about the types of collateral surety companies consider, click here.
How Do Sureties Determine Whether an Appellant is Qualified
In general, surety companies will evaluate the following factors to consider whether they believe an appellant will have the financial ability to satisfy the judgment on their own:
- Sources and stability of income
- Lines of credit
- Cash or other liquid assets
- Equity in fixed assets such as real estate
Business Entities
When it comes to business entities, there are a few additional things that surety companies take into account. One is how long the company has been in business. Companies with a long-term track record of stability give the surety more confidence about the future prospects of similar results.
Publicly Traded Companies
For publicly traded companies, surety companies also look at the company’s public filings, earnings calls, analyst reports, and debt ratings from various rating agencies such as S&P and Moody’s.
Private Entities
When referring to private entities, we are including both for profit businesses and non-profits such as universities, religious groups, and charitable organizations, etc. Fewer sureties will consider private entities, because there is significantly less information available than with public companies. The entity will need to have a financial statement prepared by a CPA with a review or audit level.
Insurance Companies
Insurance companies often need appeal bonds, but very few have the ability and proper licensing to write their own bonds with an affiliated entity. Consequently, they often have to look for a third-party surety company. To underwrite insurance companies, sureties will review their publicly filed financial statements and review ratings from third parties such as A.M. Best. We dig into this topic in greater detail in our article Appeal Bonds for Insurance Companies.
Municipalities
While most municipalities are exempt from the requirement to provide security to stay enforcement of a judgment at the state level, there are times where they are required to post a bond in federal court. Here surety companies look for annual budget surpluses showing that the municipality has the ability to meet their obligations. They also want to see that they have the liquid financial resources to pay the judgment.
High Net Worth Individuals
Most high-net-worth individuals don’t have outside CPA’s prepare financial statements for their personal assets. Therefore, it requires compiling a lot of backup documentation such as bank and brokerage statements and possibly appraisals of real estate to verify the individual’s personal net worth. For this reason, there are very few sureties that will consider providing unsecured appeal bonds for high-net-worth individuals. At CSBA, we have access to those sureties and a strong track record of providing unsecured appeal bonds for qualified applicants.
Conclusion
To obtain appeal bonds without collateral, it takes a surety agent with financial experience and access to the right surety companies. At CSBA, we work on more appeal bonds than anyone in the United States, approximately one-third of the appeal bonds we write are unsecured without collateral posted to the surety company.
