BALDIVIA XYRA

INSURANCE (SAT 1030-1230 AM)

SURETYSHIP
Sec. 175. A contract of suretyship is an agreement whereby a party called
the surety guarantees the performance by another party called the principal
or obligor of an obligation or undertaking in favor of a third party called
the obligee. It includes official recognizances, stipulations bonds or
undertakings issued by any company by virtue and under the provisions of Act
No. 536, as amended by Act No. 2206.

*Act No. 536, as amended by Act No. 2206, entitled "An Act relative to recognizances, stipulations, bonds, and
undertakings, and to allow certain corporations to be accepted as surety thereon."

Suretyship - It is an agreement whereby one (usually an insurance company) undertakes to answer,

under specified terms and conditions, for the debt, default or miscarriage of another (principal or obligor),
such as failure to perform a contract or certain duties, or for breach of trust, negligence and the like, in
favor of a third party (obligee)

Sec. 176. The liability of the surety or sureties shall be joint and several
with the obligor and shall be limited to the amount of the bond. It is
determined strictly by the terms
of the contract of suretyship in relation to the principal contract between
the obligor and the obligee, (as amended by Pres. Decree No. 1855.)

Nature of liability of surety

The contract of a surety is evidenced by a writing called "surety bond" which is essentially a promise to
guarantee the debt or obligation of the obligor.

(1) Solidary. — The liability of the surety or sureties under a bond is joint and several, or solidary. This
means that upon default by the obligor in complying with his obligation as secured by the bond, the surety
becomes primarily liable to the obligee who has right to demand payment under the terms and conditions
of the bond

(2) Limited or fixed. — It is limited to the amount of the bond

(3) Contractual. — It is determined strictly by the terms of the

(a) contract of suretyship in relation to the

(b) principal contract between the obligor and the obligee. A surety is merely a collateral contract.
Its basis is the principal contract or undertaking which it secures. The obligee does not participate
in the processing and approval of the bond application the merits
of which it is the duty of the surety to investigate and ascertain before it is approved. Any
misrepresentation made by the bond applicant cannot, therefore, defeat the rights of the obligee.

To indemnify the surety against loss, the obligor executes a

(c) third contract in favor of the surety. This contract is called an "Indemnity Agreement." The
(original) surety issuing the prime bond may cede a portion or portions of the bond to one or more
insurers or sureties under a bond reinsurance contract.
BALDIVIA XYRA
INSURANCE (SAT 1030-1230 AM)
Distinctions between suretyship and property insurance
SURETYSHIP
an accessory contract because it is
dependent for its existence on a
principal contract
there are always three parties:
1. the surety
2. the principal debtor or obligor
3. the creditor or obligee
more of a credit accomodation with the
surety assuming primary liability
surety is entitled to reimbursement from
the principal and his guarantors for the
loss it may suffer under the contract
a bond can only be cancelled by or with
the consent of the obligee or by the
Commissioner or by a court of competent
jurisdiction
requires the acceptance of the obligee
before it becomes valid and enforceable
a risk-shifting device, the premium paid
being in the nature of a service fee
Distinctions between suretyship and guaranty
* By guaranty, a person, called the guarantor, binds himself to the creditor to fulfill the obligation of the principal
debtor in case the latter should fail to do so
SURETYSHIP
assumes liability as a regular party
to the undertaking
surety is primarily liable
surety is not entitled to the benefit
of exhaustion of the debtor’s assets
It would then follow that "while a surety undertakes to pay if the principal does not pay, the guarantor
binds himself to pay if the principal cannot pay. In short, the surety is considered in law as being the same
party as the principal debtor in relation to the latter's obligation.
PROPERTY INSURANCE
a principal contract in itself
there are only two parties
1. the insurer
2. the insured
generally a contract of indemnity
there is no right of recovery for the
loss the insurer may sustain except when
the insurer is entitled to subrogation
In case of subrogation, however, the
third party against whom the insurer may
proceed is not a party to a contract
may be cancelled unilaterally either by
the insured or by the insurer on
grounds provided by law
does not need the acceptance of any third
party
a risk-distributing device, the premium
paid being considered a ratable
contribution to a common fund
GUARANTY
liability of the guarantor depends
upon an independent agreement to pay
if the primary debtor fails to do so
guarantor is secondarilty liable
guarantor has this right to have all
the property of the debtor and legal
remedies against the debtor first
exhausted before he can be compelled
to pay the creditor
BALDIVIA XYRA
INSURANCE (SAT 1030-1230 AM)

Sec. 177. The surety is entitled to payment of the premium as soon as the
contract of suretyship or bond is perfected and delivered to the obligor. No
contract of sure- tyship or bonding shall be valid and binding unless and
until the premium therefor has been paid, except where the obligee has
accepted the bond, in which case the bond becomes valid and enforceable
irrespective of whether or not the premium has been paid by the obligor to
the surety; Provided, That if the contract of suretyship or bond is not
accepted by, or filed with the obligee, the surety shall collect only a
reasonable amount, not exceeding fifty percentum of the premium due thereon
as service fee plus the cost of stamps or other taxes imposed for the
issuance of the contract or bond; Provided, however, That if the non-
acceptance of the bond be due to the fault of the surety, no such service
fee, stamps or taxes shall be collected.
In the case of a continuing bond, the obligor shall pay the subsequent
annual premium as it falls due until the contract of suretyship is cancelled
by the obligee or by the Commissioner or by a court of competent
jurisdiction, as the case may be.

Payment of premiums.

The rules are as follows:

(1) The premium becomes a debt as soon as the contract of suretyship or bond is perfected and
delivered to the obligor
(2) The contract of suretyship or bonding shall not be valid and binding unless and until the premium
therefor has been paid;
(3) Where the obligee has accepted the bond, it shall be valid and enforceable notwithstanding that the
premium has not been
(4) If the contract of suretyship or bond is not accepted by, or filed with the obligee, the surety shall
collect only a reasonable amount;
(5) If the non-acceptance of the bond be due to the fault or negligence of the surety, no service fee,
stamps, or taxes imposed shall be collected by the surety; and
(6) In the case of a continuing bond (for a term longer than one year or with no fixed expiration date), the
obligor shall pay the subsequent annual premium as it falls due until the contract is cancelled.

The premium is the consideration for furnishing the bond or the guaranty and the obligation to pay the
same subsists for as long as the liability of the surety shall exist.

Types of surety bonds.

(1) Contract bonds. — These bonds are connected with construction and supply contracts. They are for
the protection of the owner against a possible default by the contractor to comply with his contract or his
possible failure to pay material men, laborers, and sub-contractors. The position of surety, therefore, is to
answer for a failure of the principal to'perform in accordance with the terms and specifications of the
contract.

(a) Performance bond. — One covering the faithful performance of the contract; and
(b) Payment bond. — One covering the payment of laborers and material men
BALDIVIA XYRA
INSURANCE (SAT 1030-1230 AM)

(2) Fidelity bonds. — They pay an employer for loss growing out of a dishonest act of his employee.

(a) Industrial bond. — One required by private employers to cover loss through dishonesty of
employees; and

(b) Public official bond. — One required of public officers for the faithful performances of their
duties and as a condition of entering upon the duties of their offices. It ordinarily includes all officers who
have custody of public funds. The officials, to be sure, would be individually liable for any loss. The
official, however, is not always in a position to make good the loss.
The requirement of an official bond, therefore, is to protect public funds.

(3) Judicial bonds. — They are those which are required in connection with judicial proceedings. Some of
the most common kinds are injunction bonds, attachment bonds, replevin bonds, bail bonds, and appeal
bonds. The purpose of requiring a litigant to furnish a judicial bond is to indemnify the adverse party
against damages resulting from the proceeding,

Sec. 178. Pertinent provisions of the Civil Code of the Philippines shall be
applied in a suppletory character whenever necessary in interpreting the
provisions of a contract of suretyship

Article 2047 of the Civil Code provides:

"By guaranty a person called the guarantor binds himself to the creditor to fulfill the obligation of the
principal debtor in case the latter should fail to do so.
If a person binds himself solidarily with the principal debtor, the provisions of Surety shall be observed. In
such case, the contract is called a suretyship."

The law applicable to the contract of suretyship embraces:

• Articles 1207 to 1222 of Section 4 (Joint and Solidary Obligations)

• Chapter 3 (Different Kinds of Obligations)
• Title 1 (Obligations) of the Civil Code
In a solidary obligation, the solidary debtor himself is the principal debtor. Whenever applicable, the
provisions on guaranty from Articles 2047 to 2084 of the Civil Code also apply to suretyship.