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CAIB 3 - Chapter 5
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CAIB 3 - Chapter 5

Created by
@UnbeatableGreenTourmaline7702

Questions and Answers

What type of total loss occurs when property is so badly damaged that it has no value?

  • Constructive Total Loss
  • Partial Loss
  • Actual Total Loss (correct)
  • Total loss of a part

    • A Constructive Total Loss occurs when salvaging the cargo is cost-effective compared to its value.

    False

    What are the three main 'Cs' used in credit appraisal for qualifying for a Surety Bond?

    Character, Capacity, Capital

    A __________ Bond protects a company against dishonest acts of employees.

    <p>Fidelity</p> Signup and view all the answers

    Match the following types of Suretyship with their descriptions:

    <p>Personal Suretyship = Guarantor honors the promise if the debtor defaults Corporate Suretyship = An organization offers a bond on behalf of a third party</p> Signup and view all the answers

    Which type of total loss is characterized by a loss of one shipper's cargo without affecting others?

    <p>Total loss of a part</p> Signup and view all the answers

    Suretyship refers to a guarantee of performance.

    <p>True</p> Signup and view all the answers

    What is meant by 'Capacity' in relation to qualifying for a Surety Bond?

    <p>It assesses the principle's ability to complete work within a reasonable time frame.</p> Signup and view all the answers

    What is required for the accounting information when qualifying a contractor?

    <p>3-5 year financial statements with a cover letter</p> Signup and view all the answers

    A completed work record should include projects from the past 3 years.

    <p>False</p> Signup and view all the answers

    What is the formula for calculating working capital?

    <p>WC = CA - CL</p> Signup and view all the answers

    The surety will require names and addresses of principal suppliers and _______.

    <p>sub-trades</p> Signup and view all the answers

    Which of the following factors affects working capital?

    <p>Labour and Material ratio</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Working Capital = Funds available for operating expenses Net Worth = Assets remaining after liabilities are cleared Completed Work Record = Projects finished in the past 5 years Surety Policy = Guarantee for completing obligations</p> Signup and view all the answers

    A business plan is unnecessary when qualifying the contractor.

    <p>False</p> Signup and view all the answers

    What are accounts receivables and payables required for?

    <p>The surety's assessment</p> Signup and view all the answers

    Which of the following can cause delays in a construction project? (Select all that apply)

    <p>Labour disputes</p> Signup and view all the answers

    Voluntary default occurs when a contractor is forced to withdraw from a contract due to financial obligations.

    <p>False</p> Signup and view all the answers

    What must the obligee do to file a claim under a performance bond?

    <p>Notify the surety and satisfy them that a default occurred.</p> Signup and view all the answers

    A bond that guarantees payment to subcontractors and suppliers is known as a __________ bond.

    <p>Labour &amp; Material Payment</p> Signup and view all the answers

    Match the following types of bonds with their purposes:

    <p>Performance Bond = Guarantees contract completion Labour &amp; Material Payment Bond = Guarantees payment to suppliers Bond Premium = Paid in advance and may be adjusted Bond Penalty = Issued with limits same as performance bond</p> Signup and view all the answers

    What can a surety do if they find a contractor in default?

    <p>Complete the contract</p> Signup and view all the answers

    The premium for a performance bond must be paid after the contract is completed.

    <p>False</p> Signup and view all the answers

    Name one important function of a Labour & Material Payment Bond.

    <p>Reducing the cost of construction.</p> Signup and view all the answers

    To make a claim, written notice must be provided to the contractor, owner, and __________.

    <p>surety</p> Signup and view all the answers

    What does the calculation for net worth involve?

    <p>Assets - Liabilities</p> Signup and view all the answers

    The completed contract method recognizes job profit or loss only when the project is completed.

    <p>True</p> Signup and view all the answers

    What does the percentage of completion method help to reveal?

    <p>Over and under billings on jobs</p> Signup and view all the answers

    The formula for calculating net worth is: Net worth = Assets - __________.

    <p>Liabilities</p> Signup and view all the answers

    Match the following terms with their descriptions:

    <p>Indemnity Agreements = Gives surety right of action for losses incurred Third Party Indemnities = Ensures claims are paid by a third party Collateral Security = Can include cash or letters of credit Work in Progress Report = Details of contracts including percentage completed</p> Signup and view all the answers

    What is one advantage of the completed contract method?

    <p>Deferral of tax on profits until project completion</p> Signup and view all the answers

    The Work in Progress Report is used to enhance a contractor's financial state understanding for underwriters.

    <p>True</p> Signup and view all the answers

    What are the three ways a contractor can provide guarantees to the surety company?

    <p>Indemnity Agreements, Third Party Indemnities, Collateral Security</p> Signup and view all the answers

    What are Subordination Agreements also called?

    <p>Postponement Agreements</p> Signup and view all the answers

    New Contractors are at an advantage when seeking bonding due to their extensive track record on completed projects.

    <p>False</p> Signup and view all the answers

    What factors might affect the issuing of a bond?

    <p>Nature of the work, project location, bond limits required, completion date, contract conditions, and communication.</p> Signup and view all the answers

    Special contract conditions can affect the ability of the contractor to successfully perform the ______.

    <p>contract</p> Signup and view all the answers

    Match the following factors with their descriptions regarding bond issuance:

    <p>Nature of the work = Surety prefers work within contractor's expertise Project location = More remote locations increase default risk Completion date = Longer contracts involve more risk</p> Signup and view all the answers

    Which of the following is true about the conditions that can affect a contractor's performance?

    <p>They play a critical role in bond issuance.</p> Signup and view all the answers

    The surety is more likely to provide a bond if the contractor has a poor performance record.

    <p>False</p> Signup and view all the answers

    What is the primary purpose of licensing for businesses?

    <p>To provide a source of revenues and to regulate the activities of license-holders.</p> Signup and view all the answers

    Study Notes

    Marine Cargo Insurance Policies

    • Total losses in marine insurance indicate a complete loss of the insured cargo, categorized into three types.
    • Actual Total Loss: Property is completely lost or irreparably damaged, resulting in zero value.
    • Constructive Total Loss: The costs to recover the cargo exceed its salvageable value.
    • Total Loss of a Part: Only one shipper's cargo is lost, while other shipments remain intact.

    Surety Bonds

    • Definition of Surety: Assurance of certainty and security; Suretyship implies a guarantee of performance.
    • Types of Suretyship:
      • Personal Suretyship: A guarantor commits to honoring the obligations if the debtor defaults.
      • Corporate Suretyship: Involves bonds like Fidelity Bonds (protects against employee dishonesty) and Surety Bonds (ensures third-party obligations are fulfilled).

    Qualifying for a Surety Bond

    • Assessment based on the "Three Cs":
      • Character: Evaluation of the management performance of the principal.
      • Capacity: Assessment of the principal’s ability to meet contractual deadlines.
      • Capital: Verification of financial stability to complete projects.

    Claims and Performance Bonds

    • Claim Filing Procedures:
      • Obligee must inform the surety of default within time limits.
      • Obligee needs to prove a default and adherence to contract terms.
    • Effects of Contractor Default:
      • Surety can step in to complete the contract or seek competitive bids for completion.

    Labor & Material Payment Bonds

    • Guarantees payment to subcontractors and suppliers, minimizing construction delays and reducing costs.
    • Ensures credit availability and fosters timely procurement of materials and labor.

    Determining Bond Limits

    • Working Capital: Represents funds available for ongoing expenses; calculated as Current Assets minus Current Liabilities.
    • Net Worth: Amount remaining post liquidation of assets minus liabilities, indicating business growth.
    • Profitability: Evaluated through working capital and net worth assessments.

    Interpreting Financial Statements

    • Completed Contract Method: Recognizes profits only upon completion, potentially distorting financial positions.
    • Percentage of Completion Method: Preferred for ongoing projects, allows real-time profit/loss recognition based on work completed.

    Contractor Guarantees

    • Sureties may require additional guarantees to manage default risks:
      • Indemnity Agreements: Allow surety recovery for losses incurred.
      • Third-Party Indemnities: Secure guarantees for unpaid claims.
      • Collateral Security: Often cash or letters of credit to back claims.

    Eligibility for Bonding

    • New Contractors: Often disadvantaged due to limited track records; must optimize bonding capabilities.
    • Contractors with poor performance histories may struggle to secure bonding unless issues are addressed.

    Bond Issuance Factors

    • Sureties assess various factors such as project nature, location risks, bond limits, completion dates, special contractual conditions, and regular payments from the owner to ensure contractors can fulfill obligations.

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    Description

    This quiz covers essential concepts of marine cargo insurance policies, including various types of total losses. It also explores the definitions and types of surety bonds, along with the criteria for qualifying for a surety bond. Test your understanding of these important insurance concepts.

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