Demystifying Estate Bonds – Qualifying is Easier Than You Think
Securing an estate administration bond or guardianship bond should not be that hard. These bonds guarantee that the executor properly administers the assets of the estate or that the guardian fulfills their duties outlined in the management plan. Executor fraud is a very low risk to the surety company and if a mistake is made in administering an estate, it is generally an unintentional error that can be remedied. The same can be said about fraud and errors amongst guardians. Issuing these bonds is a low risk proposition and loss ratios as a percentage are in the single digits. The risk is especially low when a lawyer and other professionals are involved. Despite the low risk, the common feedback we receive is that securing a bond has been a difficult, arduous experience. It is far too often time consuming and quite frankly a confusing proposition. Because of these roadblocks, a lawyer’s first inclination is usually to have the bond requirement waived.
So this begs the question, why is the process so complicated? To get to the root of the issue we have to look at how surety companies operate. The surety industry in general is focused on contract guarantees for the construction industry since this is where most of their revenues lie. Surety for the construction industry is a very sophisticated market place with intense competition existing at both the company and broker level. This has forced high service levels, common sense underwriting and an ease of doing business. Estate related surety on the other hand is a very small subsection of the surety industry.
As a result, surety companies and surety brokerages typically don’t put a lot of emphasis on this product and it has been very slow to evolve. Most brokers might only work on one or two estate bonds per year and surety companies that do issue estates haven’t been pushed from historically conservative underwriting. This has led to a lack of understanding of the product by brokers, and a poorly developed process to obtain approvals. To make matters worse, historically bond companies have dealt directly with executors and law firms rather than through a broker. With all due respect to surety companies, this has led to much slower turn around times and much stricter underwriting.
So that’s the bad news. The good news is that in recent years, the estate surety segment our industry has evolved, and a handful of market players now understand the low risk profile of this product and have developed a system to underwrite every type of estate regardless of how complex they are. We can confidently say that with the appropriate conditions, any estate executor or guardian can qualify for a surety bond.
In practice, the surety company really needs to understand three things:
1) Inventory of Estate – What is the estate or guardianship composed of and what needs to be managed or wound down. A simple estate might include cash, investments and real estate. Something a bit more complex might contain an ongoing business. Depending on the asset type, different controls can be administered to reduce the perceived risk. For example, in the case of an on-going business, receiving a continuity plan for the business can help get to an approval.
2) Background of Executor or Guardian – The surety company will want to understand the background of the executor or guardian. Do they have relatable professional skills to perform as estate executor or guardian? Do they have a strong personal net worth in relation to the value of the bond required? For a surety, the stronger the personal net worth in relation to the value of the estate the less potential for moral hazard. A low personal net worth does not preclude an executor from securing a bond, but might require different tools to help the surety gain comfort. In some cases, a joint control agreement can be executed with a lawyer to help assist in the management of the estate or guardianship. These joint controls come in a variety of forms with different levels of control. A good surety broker will be able to discern when this is required and negotiate the correct form.
3) Background on the Estate or Guardianship – The situation giving rise to the bond requirement is an important consideration. How many beneficiaries are there, is a Will in place, is there dissention among beneficiaries? What does the management plan look like and has it been reviewed and signed off on by the PGT. Is the management plan reasonable? These are all basic questions that provide the surety with a sense of the risk profile. As long as the background that gives rise to the bond is understandable, there’s no reason to think that there will be any reason for moral hazard and the bond should be approved. Having said that, even when the situation faces challenges, risk mitigation tools like joint controls or other agreements can be put in place to satisfy the surety company and get the bond issued.
Service and Terms – What is available in today’s market place?
In today’s modern estate bond environment, applicants should expect certain terms and service standards and if they don’t receive them they should look elsewhere. The following is a list of what you should expect:
1) Initial consultation with a broker – This is a fact finding discussion to help your broker learn about the situation giving rise to the bond requirement. Your broker should describe the process and all of the steps involved to secure the bond. The broker should be willing and able to approach multiple bond companies if required. Working directly with a bond company is never advisable because a broker gives you access the entire competitive market.
2) Follow up email outlining the next steps and information required.
3) Once information is received by your broker you should expect a response within 24-48 hours. This should come in the form of an approval or a request for additional information.
4) Pricing: Administration bonds should cost 0.5% to 1% of the bond amount as a one-time fee with no renewal premiums charged regardless of how long the bond is outstanding. The bond should not have to be retrieved from court and returned upon estate settlement. Guardianship bonds are charged as an annual fee of 0.25-0.5% with a one-time fee option available depending on the situation and the duration of the guardianship.
5) Once an approval is received and accepted, you should expect the bond to be sent out for next day courier.
The legal community’s frustration with securing bonds is justified. As an industry we haven’t done a good job of providing clarity on our offering and following though with excellent service. It can and should be much easier to secure these bonds and we believe that with time the industry will continue to evolve to respond better to these challenges.
At FCA Surety, we not only adhere to the service standards outlined above, we have in-house authority to issue estate bonds. All of our brokers have worked as underwriters in the past and because of our relationships with surety companies, we have been given this authority. We look forward to working with you on your next estate bond requirement.