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Fundamentals of Risk and Insurance, 11th Edition by Therese M. Vaughan, Emmett J. Vaughan

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CHAPTER OBJECTIVES

When you have finished this chapter, you should be able to

  • Identify the three parties to a surety contract and describe their roles
  • Distinguish between suretyship and insurance
  • Identify and describe the five main categories into which surety bonds may be classified
  • Describe the coverage provided by trade credit insurance policies and distinguish between “extraordinary coverage” and “general coverage”
  • Describe the purpose of credit enhancement or financial guarantee insurance

Although surety bonds and trade credit insurance might seem unrelated, the two are similar: both are designed to protect against financial losses from default by someone on whom the insured depends.

When a business firm or a government organization hires a contractor to erect a building or perform some other work, it assumes the building will be put up according to plan or the work will be completed. This is not always the case. The contractor may go bankrupt and be unable to complete the job. When a business extends credit to one of its customers, it assumes the customer will pay for the goods, but credit losses do arise. Because these possibilities exist, risk exists, and such failures may produce serious financial loss.

One approach to dealing with these exposures is loss prevention. A business can choose which customers will be given credit or investigate the financial stability of a ...

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