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The Surety & Fidelity Association of America (“SFAA”) is a trade association of surety companies that write the majority of surety bonds in the United States. The National Association of Surety Bond Producers (“NASBP”) is a trade association dedicated to the needs and interests of surety bond producers and serves a membership with personnel of surety producers (also called surety agents and brokers). In recent years, bond obligees, particularly state departments of transportation, have implemented or considered the implementation of electronic bonding methodologies. Additionally, changes in work dynamics and increased remote working have increased the demand to conduct more surety transactions electronically. The SFAA and NASBP continue to support the electronic execution and delivery of bonds. Electronic processes yield benefits to all parties of the bond transaction, such as reduced processing costs and greater efficiency. However, because a bond is a contract, it is critical to preserve all the elements necessary for an enforceable contract and protect the integrity of the transaction as the process moves between physical and electronic environments.
Electronic Bonding – General Definitions Used
For uses within this document, the term electronic bonding is meant to indicate a process which allows for the creation of a surety bond by wholly electronic means, substituting required actions and elements comprising standard methods utilized for bonding with acceptable equivalent digital activities and tools.
The Bond Execution Process
A surety bond is a three-party agreement whereby the surety guarantees that one party (the principal) will perform its obligations owed to another (the obligee). Both the surety and the principal are liable to the obligee. Therefore, both the surety and principal sign the bond. When the bond is a paper document, the bond execution process generally follows the following steps:
- Surety producer completes the necessary information on the bond form.
- Surety producer signs the bond on behalf of the surety, affixes the surety’s corporate seal, and attaches a power of attorney evidencing the producer’s authority (evidencing the producer’s authority as attorney-in-fact) to sign the bond.
- Surety producer sends the bond form to the principal.
- Principal signs the bond form.
- Principal delivers the bond to the obligee.
An electronic methodology must translate and incorporate these activities, which contain legal implications, from the “paper world” to an “electronic world.” While each activity must be included, they do not have to follow the sequence above and may include or substitute other activities or mechanisms that facilitate or enhance bond execution, delivery, memorialization, authentication, tracking, modification, and release while preserving the requisite protections of all parties. The methodology also should incorporate a process for power of attorney authentication, execution, and recordation. Finally, the methodology shall be compatible with available remote or alternative electronic means for notarization or fraud prevention.
Electronic Bond Execution Process
A major interest to sureties is that bond obligees implement methodologies that are not restricted to a technology provided by a specific vendor. Sureties desire the ability to choose the technology or vendor that best meets their and their clients’ needs rather than be required to use a single vendor’s proprietary technology. SFAA and NASBP believe that all participants in surety agreements are best served when competition is fostered and multiple technology vendors can operate in the surety bond execution market.
Possible methodologies for electronic bond execution include, but are not limited to, the following:
- Transmitting an electronic bond with digital signatures and other legal attributes or documents using secure messaging technology.
- Executing a bond electronically through an Internet-based bond clearinghouse or “virtual signing room” or similar methods using emerging technologies such as blockchain or distributed ledgers.
- Executing a bond electronically through a token-based authentication system.
SFAA and NASBP seek to assist vendors by providing guidance as to the interests of principals, obligees, producers, and sureties, and the legal requirements in the bond execution and delivery process. This guideline presents a checklist that is reflective and protective of those interests.
Checklist of Required Characteristics
Any electronic bonding methodology must possess certain essential characteristics. These are:
- The methodology maintains the existing legal relationships and obligations among the parties.
- The execution and delivery process ensures the validity and nonrepudiation of the bond.
- The process contemplates and satisfies the requirements of the statute of frauds, which requires the inclusion of the language of the obligation.
- The methodology includes or permits the signature of the surety and principal using digital signature technology, or other proven technologies.
- Provides for an acceptable digital equivalent to the surety’s corporate seal as required by the surety and/or obligee, and to meet any related statutory requirements.
- Permits the signing by two or more different parties at different points in time, while maintaining an audit trail.
- Provides assurance that, aside from affixing its signature, neither the principal nor obligee, has altered the bond.
- Ensures the identity and authority of the surety’s attorney-in-fact, by incorporating or allowing the incorporation of unalterable electronic powers of attorney, which must be granted by the surety.
- The electronic bond should be stored in a secure, immutable manner, in an environment providing an effective access and change audit trail, and retrieved only by authorized parties presenting appropriate permissions and credentials.
- Electronic bonds’ storage environment should support the creation of digital or print copies, so that copies created provide a trustable, secure, and unalterable representation of the original bond, meeting requirements of legitimate interests to the bond agreement.
- The bond must be transmitted using the current standard for data in motion as defined by NIST SP 800-52 (https://csrc.nist.gov/publications/detail/sp/800-52/rev-2/final), or an equivalent authority, and utilize a minimum of TLS 1.3 (256 bit encryption) to protect against repudiation and tampering.
The following are suggested characteristics:
- Uses generally accepted industry data standards for integration purposes.
- Integrates with the variety of systems and processes of the various parties involved in the bond transaction.
- Permits the use of a trusted third-party, or similar method using emerging technologies such as blockchain or distributed ledgers, to certify delivery, signatures, seals and POA authority.
SFAA and NASBP staffs are willing to meet and discuss these characteristics with any vendor interested in serving the surety bond market or obligees interested in establishing an electronic bonding methodology.