Texas General Lines — Property and CasualtySurety and BondsMedium
A surety bond is issued with a Penal Sum of $50,000. The Principal defaults on their obligation, causing the Obligee to incur actual damages totaling $65,000. Assuming the bond has no specific clauses for exceeding the penal sum, what is the maximum amount the Surety is obligated to pay the Obligee?
- A$65,000
- B$50,000
- C$15,000
- DThe full amount plus legal fees
Show answer & explanationAnswer & explanation
Correct answer: B. $50,000
The Penal Sum represents the maximum liability of the Surety, regardless of the actual damages incurred. In this case, even though damages are $65,000, the Surety's obligation is capped at the $50,000 penal sum.
Why the other options are wrong
- A. $65,000 is the actual damage, but the bond limits the payout to the penal sum.
- C. $15,000 represents the difference between actual damages and the penal sum, not the payout.
- D. Legal fees might be separate, but the core payout for damages is capped by the penal sum.
Penal Sum
The maximum amount of money the surety bond will pay out in the event of a claim.
- Represents the surety's maximum liability.
- Specified in the bond agreement.
- Also known as the 'bond penalty' or 'face amount'.
Memory trick: Penal Sum: The ceiling of the surety's financial pain.