Most people are unfamiliar with the term “surety bond”, and may never have run across the concept. When a court appoints someone to manage another person’s money, a surety bond is often involved.
Different kinds of fiduciaries
Depending on the context, a court might appoint a conservator to handle the estate of someone who is unable to manage their own finances. In some states (other than Arizona) that person might be called a guardian of the estate. Arizona, and many other states, will almost always require a surety bond.
In a probate proceeding, a personal representative (sometimes called executor in other states) may be required to post a surety bond. The decedent’s will might waive the bonding requirement — most do — but there might not be a will, or there may be other reasons to require a bond.
Even a trustee (when appointed by the court) might be required to post a surety bond. It is less common, but not unheard of.
In any of these cases, the appointee will not be able to act until he, she, they or it (what a richness of pronouns!) have filed the surety bond with the court. But what is a surety bond? What does it mean, and who is it intended to protect?
What is a surety bond?
The notion of a surety bond is not limited to court proceedings. A contractor, for example, might have to post a surety bond as part of its promise to adhere to the terms of the contract. But the context in which we (at Fleming & Curti, PLC) deal with surety bonds is almost always for fiduciary appointments in probate court.
The court surety bond is an agreement between the fiduciary, the court and (usually) an insurance company. Think of it as a specialized kind of insurance policy with a three-way promise. The fiduciary promises to behave appropriately. The insurance company promises to pay the estate back if the fiduciary does not behave. The court promises to release the insurance company from further liability once the fiduciary has gotten approval of its final accounting.
The size of a surety bond will usually be the amount of the estate plus a year’s likely income. The surety bond requires an annual premium, which can be paid from the estate itself. The insurance company will not issue the bond until they have run a credit check on the proposed fiduciary, and no everyone will be able to secure a bond.
What happens when things go wrong?
If a fiduciary steals, misinvests, or simply drops out of sight, the estate might file a claim against the surety bond. In theory, the insurance company then pays back the estate (after the court appoints a new fiduciary, of course) and the protected funds are kept whole.
You also have insurance on your car and home, of course. Those policies help protect the value of your assets — even if they are damaged by your own mistakes. Leave the stove on while you slip out to do yard work and the resultant fire will be covered by your insurance policy. Let your attention drift while driving and your insurance company will repair your car and the car you hit. Surety bonds don’t work exactly the same way.
Take, for instance, the surety bond issued to Penn Steuerwald in a Florida probate case. Mr. Steuerwald was appointed as personal representative of his late brother’s estate in 2009. The probate judge ordered him to post a $1 million surety bond.
Mr. Steuerwald did post the bond, securing a policy from Western Surety Company. Then the court issued “letters of administration” and he proceeded to manage the estate.
One problem: Mr. Steuerwald was removed as personal representative three years later, and ordered to repay the estate $970,103.91. The insurance company stepped in, recovered what it could and ended up writing a $772,245.32 check to the estate. Case closed, right? Good thing there was a bond, and everyone is now happy.
Not so fast….
When Mr. Steuerwald secured his bond, he signed a batch of papers. Among them was an indemnification agreement. He promised to pay back Western Surety for any losses they might experience on the bond.
Surety bonds are intended to protect the estate (and the court’s interest), not the fiduciary. Western Surety sued Mr. Steuerwald for its loss — plus interest and attorneys fees.
The federal district court in Florida ordered Mr. Steuerwald to repay Western Surety a total of $1,313,898.44 (a number that grows, with interest, every month). He appealed.
Last week the federal Eleventh Circuit Court of Appeals upheld the award. It also noted that Mr. Steuerwald’s attempt to blame his problems on the probate judge, the insurance company and its lawyers were unavailing. He had agreed to pay back Western Surety if he engaged in wrongdoing, and he would be liable for just that.
Note that we said insurance companies typically do a little background checking before issuing surety bonds — particularly large bonds like the one Mr. Steuerwald posted. Funny, but a quick internet check on Mr. Steuerwald reveals that a lawyer with exactly the same name was disbarred in New York back in 1983 for taking money from three clients (and possibly two others). Might have been a different Penn J. Steuerwald, we suppose.