When Obligated Parties Fail to Pay Debts

What best describes guaranty insurance? Originally a form of insurance issued back in the 1930’s as mortgage guaranty insurance and forty years later was revised to include several different forms, including municipal bond guaranty insurance, limited partnership investor bond insurance, residential value insurance, to name a few. Today, most states exclude mortgage guaranty or any consumer-oriented credit insurance from their definition of financial guaranty insurance.

The function of being a surety

It is the obligation of a surety to pay the debts of or answer for the default of another. A three-party contract is a basis for a suretyship: One party (surety) undertakes to answer to a second party (obligee) for the debt or default of a third (principal) resulting from the third party’s failure to pay or perform as required by an underlying contract or legal obligation.

It is generally recorded as surety on the annual statement that insurers file with regulators. A loss may be payable in any of the following events: the failure of an obligor on a debt instrument or other monetary obligation to pay principal, interest, purchase price or dividends when due as a result of default or insolvency. This includes corporate or partnership obligations, guaranteed stock, municipal or special revenue bonds, asset-backed securities, consumer debt obligations, etc.

This also pertains to a change in interest rates, a change in currency exchange rates, or a change in the value of specific assets, commodities or financial indices. These contracts usually involve sophisticated insureds, and therefore rates may be exempt from general statutory standards.

Most bonds that are issued are insured by a financial guaranty firm, also referred to as a monoline insurer, against default. The global financial crisis of 2008 hit financial guarantee firms particularly hard. It left numerous financial guarantors with billions of dollars of obligations to repay on mortgage-related securities that defaulted and it caused firms to have their credit ratings slashed. Talk to your agent if you have questions pertaining to guaranty insurance and how it works.

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