How They Are Underwritten and Why
The How and Why
While appeal bonds are technically an insurance product issued by insurance companies (typically called surety companies), the nature of the guarantee resembles more of a bank loan. When a surety company issues an appeal bond, they are guaranteeing to pay the judgment to the judgment creditor if it is not satisfied by the appellant (judgment debtor) that obtains the bond. Since many money judgements are not overturned on appeal, it creates a high probability of a claim against the bond.
Unlike insurance, surety bonds are underwritten and priced not to have losses in theory. So, when you consider the high probability of a claim against a bond and the low premium that is charged which is insufficient to cover losses, surety companies have to be very confident that the appellant for which they are issuing the appeal bond will have the financial ability to pay the judgment in the future, several years in some cases, when the appeal is decided.
Therefore, to consider providing an appeal bond without collateral, a surety company evaluates the financial statements of the appellant applying for the bond. The financial statements must be strong enough to convince a surety company that the appellant will be able to satisfy the judgment on their own. To read more about the specific requirements for qualifying for a bond without collateral, read our article:
Qualifying for an Appeal Bond Without Collateral
When Collateral is Required
For those situations where collateral is required, clients have four options for the type of collateral they can post.
Using cash as collateral for a supersedeas bond carries several advantages, such as some sureties paying interest on the cash deposit. Another advantage of using cash as collateral is that it can shorten the time it takes to acquire the supersedeas bond versus posting another type of collateral.
For more information on using cash collateral, visit our article: Using Cash Collateral.
Bank Letters of Credit
A letter of credit is essentially a promise by a bank to pay a beneficiary (in this case, the surety company) a specified amount upon demand, which is typically equal to the bond amount. Given the liquid nature of a letter of credit, this form of collateral is seen as very similar to cash collateral by sureties.
For more information on how to secure an appeal bond using a bank letter of credit, read our article: How Letters of Credit Work to Secure Appeal Bonds
Real estate is also an option, but there are only two sureties that currently consider taking real estate as collateral for supersedeas bonds. The sureties will primarily consider residential real estate (single and multi-family) and commercial properties (office, industrial, and retail).
To learn more about whether real estate is the right option for you, read our article Using Real Estate to Secure Appeal Bonds
This type of collateral includes stocks and bonds held in non-retirement accounts, as well as mutual funds, exchange-traded funds, and money market funds. If the appellant wants to use marketable securities for collateral, they must first provide the surety company with their most recent account statement and the value of the account usually needs to exceed the amount of the bond.
To learn more details about how pledging a marketable securities account works, read our article: Securing an Appeal Bond Using a Stock or Bond Portfolio