Use a Surety Bond to Protect Your Investments

If you own corporate stock, hold a promissory note, or have another valuable document, a situation could arise where a surety bond will be needed to protect your investment. If such a legal instrument is lost, stolen, or destroyed, it is usually possible to have it reissued by obtaining a lost instrument surety bond.

Lost instruments and surety bonds

The general term "lost instrument" is used to mean various types of legal documents with some kind of financial value that have been lost, stolen, or destroyed. Common types of lost instruments include:

• Corporate stock certificates
• Corporate bonds
• Municipal bonds
• Promissory notes
• Mortgages
• Security agreements
• Deeds
• Title documents for motor vehicles and other items
• Insurance policies
• Certificates of deposit
• Personal or business checks
• Money orders
• Cashier's checks

In the context of lost instruments, a surety bond is a legal agreement among three parties:

• The principal: the person who had the instrument that was lost
• The obligee: the person who issued the instrument
• The surety: the company that provides the surety bond

A surety bond is somewhat like an insurance policy for the obligee, with the principal paying the premium. The surety promises to pay the obligee a certain sum if there are any legal claims against the obligee due to the replacement of the lost instrument. This can occur if the original lost instrument reappears in someone else's possession and payment is demanded.

If the surety ends up paying the obligee, the surety will then seek reimbursement from the principal. In case the principal later finds the original missing document, the terms of a lost instrument bond will require the principal to turn it over to the bonding company or to the obligee.

Types of lost instrument surety bonds

There are two types of surety bonds for lost instruments. Which one is needed will depend upon the nature of the instrument that was lost:

• A fixed penalty bond is used if the value of the lost instrument is a fixed sum that cannot increase or decrease over time: for example, a $500 money order.
• An open penalty bond is used if the value of the lost instrument is subject to change over time: for example, a certificate for 100 shares of corporate stock, where the value of a share can change.

Obtaining a bond

When the principal notifies the obligee of the loss and requests a replacement document, the principal is often required by the obligee to do two things:

1. Provide an affidavit, signed before a notary public, certifying the loss and agreeing to indemnify the obligee for any loss; and
2. Obtain a lost instrument surety bond.

The obligee will tell you what is required to obtain a replacement document, such as providing an affidavit of lost stock certificate or an affidavit of lost promissory note, and what type and amount of bond is required. All states have laws governing surety bonds, and obtaining a bond also may be required by state law.

Generally, a lost instrument surety bond can only be obtained if the instrument has been lost for at least 30 days. To obtain a bond, an application is submitted to a bonding company. This will include providing the date that the instrument was lost, as well as an explanation of the circumstances surrounding the loss. The applicant, whether an individual person or a business entity, also will need to provide financial information to determine the applicant's creditworthiness.

The amount of the bond will be based on the value of the lost instrument. It may be for more than the face amount of the lost instrument. For example, a lost promissory note for $10,000 may require a bond of one and a half times that amount, or $15,000.

Surety bond premiums are based on the amount of the bond, and can vary based upon the state, the bond company, and the applicant's creditworthiness. The premium may be based on a set percentage of the value of the lost instrument, or there may be a flat fee for bonds up to a certain amount, with incremental increases for more valuable instruments. For example, the fee might be $100 for any bond of $5,000 or less, with an additional $20 for each additional $1,000. Bonds are usually issued for a period of one year, although the obligee may require coverage for a longer period.

If you lose a valuable document, your first step is to notify the obligee and find out what is required to get a replacement document. If a lost instrument surety bond is required, you will then need to contact a bonding company to apply for the bond.