Understand How a Depositor Bond Works

There are many different types of Surety Bonds, and a Depositor Bond is one of those types.  Surety Bonds are credit instruments issued by major insurance companies.  There are the three parties to any surety bond.  Under a Depositor Bond, the Surety (an insurance company) is liable to the Obligee (the depositor) if the bond Principal (the bank) becomes insolvent, and deposits in excess of the $250,000 insured by the FDIC are not returned to the depositor upon demand.  The bond Obligee is both the depositor and beneficiary of the coverage, who may be any type of entity including a person, trust, business, or governmental entity.  The bond Principal is the bank who is legally responsible to perform the obligation for the Obligee, which is to return deposits upon demand.  From a historical perspective, Surety is one of the oldest forms of credit guarantee, dating to biblical times when one person would act as surety for another person, “co-signing” to further guarantee an obligation of one person to another.  Today, Surety is a corporate business more than 100 years old. 

All Surety Bonds have the following characteristics:

  1. There is an underlying legal obligation to be performed between two parties, and that legal obligation is then additionally guaranteed by the Surety (a third party) in the language of the bondIn the case of a Depositor Bond, one party (the bond Principal who is the Bank) has agreed to perform the underlying legal obligation for another party (the bond Obligee who is the Depositor).  That legal obligation is to return deposits upon demand to the depositor.  The language of the Depositor Bond provides an additional guarantee from the Surety that this obligation will in fact be performed, by legally binding the Principal and Surety together to perform the obligation.  
  2. The Surety (via the bond) guarantees that the Principal will perform the underlying legal obligation for the bond Obligee, and if the Principal fails to perform, the Surety is then legally obligated to “step into the shoes” of the Principal and perform the obligation for the Obligee.  Thus, for a Depositor Bond the Surety would become legally obligated to return the deposits in excess of the $250,000 FDIC coverage to the Obligee, if the Principal became insolvent and failed to do so upon demand. 

In summary, the Depositor Bond provides a third party guarantee (from the insurance company who is called the Surety) that deposits will in fact be returned to the depositor.  Depositor bonds are designed to be “Excess FDIC Insurance Coverage” and coverage begins at the point where the $250,000 FDIC insurance obligation ends.