Donald Trump’s two recent courtroom losses and the staggering legal debts he now owes have put the spotlight on an obscure segment of the insurance market—the appeal bond.

On Friday, Trump used the Federal Insurance Company, an arm of the insurance giant Chubb Ltd. to post a $91.6 million in bond to delay the execution of a jury verdict in E. Jean Carroll’s defamation lawsuit. While he successfully arranged the deal just days before a March 11 deadline, he still faces a much larger judgment, totaling $450 million, from a civil fraud case brought by New York’s Attorney General in less than two weeks.

Related article: Trump Posts $91.6M Bond From Chubb Subsidiary in Carroll Case (insurancejournal.com)

It won’t be easy for Trump to post an appeal bond in the neighborhood of $500 million ($450 million plus 10 percent interest) on his own. He has about $400 million in cash on hand, according to testimony in the New York Attorney General’s case, but he would need those funds to keep running his business — which means he is likely already working with Federal Insurance or a competing surety company to arrange the bigger bond.

An appeal bond isn’t a bail bond, the get-out-of-jail kind written to free criminal defendants awaiting trial. It’s more for people like Trump, who have lost a civil case and owe a financial penalty, to contest the judgment. If the debtor wins on appeal, he gets to keep the money. But if the appellate court rules against him, the appeal bond, which amounts to the full judgment plus interest, goes to the courtroom victor.

Trump’s court filing didn’t provide details on how he financed the $91.6 million bond. Nor did Chubb, which said, “as a matter of policy, we do not comment on client-specific information.” The standard premium for appeal bonds is 2 percent, according to people familiar with the business. At that rate, Trump’s bond would have cost him $1.8 million, unless he negotiated a better rate.

Absent a fire sale of his trophy properties, or a sudden infusion of funds from an angel investor, Trump would most likely have to pledge some of his real estate assets as collateral for his next appeal bond. And if those properties are encumbered in any way with mortgages or loans, the surety underwriter would have to devise a way to put the bond in a priority position.

Then there’s the issue of Trump himself, who has a checkered past when it comes to paying off debts.

“Trump would have extreme difficulty getting this amount from a surety or an institutional lender,” said Scott Horton, a lawyer who specializes in human rights and international law, but started off in judgment enforcement.

“He has existing lenders, and the lenders almost certainly have negative pledge agreements in their arrangements with him. He would have to get waivers. This is all inside a case where he has been found to have committed fraud in dealing with financial institutions. It’s very difficult to see a financial institution agreeing to post a bond in the amount necessary here.”

Surety Bonds

Appeal bonds are a narrow subset of surety bonds, a class of debt most frequently used by contractors to guarantee that any major project will have the funds to ensure completion, even if the contractor can’t finish the job. Although surety underwriters regularly deal with multi-million dollar bonds, they’re not to be confused with Wall Street’s “Masters of the Universe.”

“There are a lot of people who fall into surety underwriting,” said Neil Pedersen of Pedersen & Sons Surety Bond Agency. “They thought they were going to Wall Street and wound up in an insurance office in Philadelphia.”

Surety bonds generate more than $8 billion in premiums per year, according to Mark McCallum, chief executive officer of the National Association of Surety Bond Producers. Big insurers have been acquiring surety agencies in recent years, and smaller independents are consolidating.

“We used to be the red-headed, unwanted stepchild of the insurance industry,” said Pedersen. “But we became popular.”

For the big insurance firms, the past decade has been a challenge, as a wave of natural disasters has hurt their bottom lines and driven senior management to look elsewhere for reliable profits. Surety bonds get their money upfront, with premiums that range from 0.5% to 2%.

“Surety is the only insurance product line that makes money from day one,” said Pedersen.

Loss Ratio

Insurers often underwrite policies so that their total loss ratio–the ratio of losses to premiums earned – might stretch to 100%. Surety companies underwrite to a loss ratio of zero, said Nick Newton of Assured Partners.

The big firms used to view the surety business as more aligned with banking than insurance, said Newton.

“A banker is not going to lend you money if you’re not going to pay him back,” he said. “We’re not going to bond someone if we don’t think we’ll get our money back.”

Surety underwriters can lose money when a bonded contractor fails to complete a big job, but when it comes to appeal bonds, there’s almost no ambiguity.

“If the court denies the appeal, the story is over,” Newton said.

After financier Lynn Tilton, Wall Street’s “Diva of Distressed,” lost a $38.2 million judgment in 2020 against TransCare Corp., an ambulance company that collapsed under her ownership, she lined up a surety bond from Argonaut Insurance Company. That enabled her to appeal the case, but the 2nd US Circuit Court of Appeals ruled against her last year. At that point, the judgment creditor didn’t have to chase her down for the funds. The pot of money in the appeal bond, with interest, had swollen to $51.5 million.

“As a plaintiff’s lawyer, I love appeal bonds,” said Bijan Amini, a lawyer for TransCare, which collected the judgment. “Once it’s in place, and the appeal is over, it’s like, ka-ching!”