Different Types of Bonds

A common misconception of bonds is that they are all considered surety bonds, but this is not the case. Bail bonds, treasury bonds, investment-grade corporate bonds, junk bonds, foreign bonds, mortgage-backed bonds, and municipal bonds are completely different than surety bonds. Bonds acting as a financial investment pay out agreed upon interest payments to the bond holder, often referred to as the “creditor”. Once the bond matures, the principal (borrowing entity) pays the face value of the bond. Bail bonds have two parties, the court and the defendant, and have the most similarities to surety bonds as they are guaranteeing that the defendant will show up in court. Investment bonds can be sold on secondary markets and publicly traded. However, surety bonds have a three-party structure with a principal, oblige, and surety. Surety bonds are used to guarantee the completion of construction projects, that a business will conduct themselves in accordance to local and federal laws, or fulfill requirements set forth by special courts such as a probate court.

A surety bond producer or agency typically will not issue bail bonds, investments bonds, or municipal bonds. Surety bonds are more similar to insurance products and are sold by surety brokers and agents who are typically affiliated with an insurance company or brokerage. Surety carriers are often the same as commercial insurance carriers. Despite the similarities, surety bonds are not the same as insurance products but are sold by insurance agents. Most insurance agents are unaware they only need a P&C license to earn commission off surety bonds. Most surety bond clients (referred to as the principal) are unaware their commercial insurance agent can sell them the surety bonds they are required to have. This often leads to the principals having to purchase their insurance from their insurance agent then searching for a surety bond broker or agent to purchase their bonds.

Who Can Sell Surety Bonds?

The principal of a surety bond (business owner or contractor) cannot purchase a surety bond directly from the surety carrier. Most principals are unaware they can purchase surety bonds from the same insurance agent who sells their commercial insurance. Making the process of purchasing a surety bond more complex, most insurance agents are unaware they can sell and earn commission on surety bonds. The principal must purchase the surety bond through a licensed insurance agency, agent, or brokerage. An agent, agency, broker, producer, or brokerage must have a Property and Casualty license in order to be paid commission on surety bond premiums.

Oftentimes, the underwriter who assesses the risk with surety bond applications for the carriers does not have a P&C license, as they are not earning commission on their bond sales. Insurance regulations are different in each state but all require that any insurance producer or agent earning commission on surety bond premiums have a P&C license. Earning a salary or bonus does not constitute earning commission. As long as a surety producer or surety broker works for a licensed brokerage or agency with at least one owner or employee being licensed in the state in which the bond is sold, commission can be earned from a surety bond. Oftentimes, the surety carrier will require the surety brokers with power of attorney to have a P&C license before they are granted power of attorney to issue bonds. Surety agents and producers without power of attorney will have to purchase bonds from the carrier or the brokerage on behalf of their clients.

Insurance agents who are unfamiliar with surety bonds should secure an appointment with a trusted surety bond broker. Surety brokers are often appointed with dozens of different surety carriers. Having multiple surety appointments allows the broker to secure the lowest premiums for the appointed agents and clients. An insurance agent can secure their own surety appointment without using a broker. However, if surety bonds are not a big piece of their business, most retail insurance agents will not be able to secure appointments with sureties that have the best premiums. This can cause the insured clients to shop surety bond rates and possibly move their entire commercials book of insurance business to the agent who can handle their insurance and bonding needs.

Different surety carriers have varying standards for their surety appointments. Some may require a minimum volume amount or they may only appoint brokers/agents who are experts in the surety bond industry. If an insurance agent who is unfamiliar with surety secures an appointment directly with the carrier, it can lead to some negative outcomes. Surety underwriters tend to frown on incomplete applications, applications with missing supplemental documents, and surety bond applications that do not match their appetites. This can lead to longer application process times, higher rates, and a decline in service. Surety carriers, who appoint all agents regardless of experience, tend to have a more automated system in place. Applications are sent to a general inbox or can be submitted online, usually without ever consulting with a surety underwriter. These applications can often take weeks to quote.

Securing an appointment with a surety broker such as Allied American Underwriters, a division of USG Insurance Services can allow retail insurance agents to have the best of both worlds. When becoming appointed with USG, retail insurance agents can offer their insureds a fast application process, the most competitive quotes, and a surety broker to answer all questions and set realistic expectations. This allows the insurance agent to focus on assisting all of their clients’ insurance and surety needs, without all of the back-end work of remembering each specific caveat of the 13,000+ different types of surety bonds. Insurance agents appointed with USG earn commissions and have access to easy bond payment portals and additional educational resources from interacting with a surety broker directly.

Identifying Clients Who Need Surety Bonds

Commercial insurance agents have numerous existing clients who are required to purchase surety bonds. It can be challenging to figure out which insureds need to purchase bonds and when. There are three main types of surety bonds: commercial, contract, and court bonds. Understanding each of the three types will allow for easier identification of insureds that also need to purchase surety bonds.

Commercial Bonds

Commercial surety bonds, also referred to as “license and permit bonds”, are most often required when a business applies for a business license and must be renewed each year for the life of the business. Businesses that are required to have this subtype are:

  • Appraisal Management Companies
  • Auctioneers
  • Bars, Restaurants, and Any Business With Alcohol Sales
  • Cannabis Related Businesses
  • Car Wash Owners
  • Cleaning Services
  • Contractors
  • Convenience Stores Who Sell Lottery Tickets
  • Driver Training Schools
  • Health Clubs
  • Home Health Care Providers
  • Immigration Consultants
  • Mobile Home Manufacturers
  • Mortgage Brokers
  • Motor Vehicle Dealerships
  • Notaries
  • Pharmaceutical and Medical Equipment Businesses
  • Public Officials
  • Realtors
  • Retailers of Tobacco Products
  • Telemarketing or Fund Raisers
  • Travel Agents
  • Truckers and Other Transportation Related Businesses
  • Unaccredited Schools or Colleges

Contract Bonds

Contract bonds tend to have the highest premiums and are needed by contractors, though not all contractors need contract bonds. Contractors may need to purchase a commercial bond for their business license or a permit to operate in a specific city or county. They will also need to purchase bid bonds, performance and payment bonds, labor and materials bonds, warranty bonds, maintenance bonds and developer bonds.

Public and private construction projects are the two general project types for contractors. Public jobs, such as renovations to a school or a contract with the city to maintain roads or salt sidewalks, require a bid bond and performance and payment bond to be purchased for public over a certain amount. Each city, county, state, and federal government entity can require a bond for any size project if they choose too. The same applies with private work. If an owner of a retail store wants a new location to be constructed, they can choose to require any contractors who wish to bid on the project to be bonded.

Court Bonds

The last and least common type of bond is a court bond. Court bonds are required by a court. A court may require executors of wills and trusts to obtain a surety bond to ensure that the trust or will is executed as the benefactor intended it to be. Pennsylvania for example, has a requirement that any executors who reside in a different state than the benefactor must obtain a probate bond before being granted approval to execute a will. Court appointed guardians must obtain a probate bond in order to have control over a minor or incapable person’s well-being and their assets. Public officials such as a local treasurer must obtain a type of court bond in order to sign checks on behalf of the city. Different states, cities, and industries have varying types of bonding requirements. If an agency is in California, their clients may need numerous bonds of all types. If an agency is located in a less populated state such as Missouri, they may not need as many commercial bonds as they do contract bonds. States located in the northeast that are clustered together may require more probate bonds than larger states in the Midwest. Becoming appointed with a broker such as AAU will enable an agency to have access to surety insight that can be used to penetrate their existing book of commercial insurance with surety bonds.

Empowering Insurance Agents with the Power of Surety: Step 1

Surety bonds are not the most common product in an insurance agent’s commercial book of business. Many insurance agents are unaware they are able to fulfill their insureds’ surety bonds needs. Even more, insureds are unaware they can purchase their surety bond through their insurance agent! It’s time to change that! A multiple part blog series will cover the various aspects of surety bonds that agents need in order to empower themselves.  With the proper knowledge, agents will develop the confidence to penetrate their existing book of commercial business, as well as attract new commercial insurance business by offering surety bonds.

The first step is becoming appointed with a surety or a surety bond broker, such as Allied American Underwriters (AAU), a division of USG Insurance Services, Inc. Some sureties will appoint retail insurance agents to submit bond applications directly. Other sureties are more selective with which agencies they will appoint. A surety that values top-line growth will appoint as many agents as possible. In order to protect their bottom line, these sureties may not be able to underwrite every type of surety bond and must enforce higher underwriting criteria. These sureties tend to have a general email for agents to submit submissions or online platforms, allowing agents to do all of the work. Sureties that value their bottom line will be more selective with appointing agents. An appointed agent will often have an individual underwriter assigned to them, to personally review each bond submission. Underwriting tends to be more relaxed and a variety of bonds can be underwritten. These sureties are selective, as they must appoint agents who are familiar with surety bonds and the specific appetites each surety has.

A way for retail insurance agents to have the best of both worlds is to become appointed with a surety bond broker, like AAU. By using a broker, agents can have access to all types of surety bond markets, underwriting styles, and free up their time and resources for commercial insurance business. Agents who are appointed with a broker still earn surety commissions and fulfill their client’s needs, despite their credit or backgrounds. AAU is appointed with 24 surety carriers and can place all types of bonds with varying degrees of risk.

DMEPOS Bonds

A $50,000 Durable Medical Equipment, Prosthetics, Orthotics, and Suppliers (DMEPOS) bond is required of businesses who submit bills to Medicare and Medicaid for the sale of durable medical equipment, prosthetics, orthotics and other medical supplies. The Center for Medicare & Medicaid Services requires this bond to be renewed for the life of the business license. DMEPOS bonds are commonly referred to as Medicaid or Medicare bonds and patient trust bonds. These bonds have premiums that are based on the credit of the owner, business and personal financials, and how long the business has been operating. Premiums can range from 1% to 15% of the bond penalty amount.

These bonds are required to ensure that medical suppliers, dentists, pharmacists and other businesses that submit billings to Medicaid and Medicare do not market medical equipment that is unnecessary to clients or submit fraudulent billings to Medicaid or Medicare for reimbursement.

One business may need to purchase numerous DMEPOS bonds. A $50,000 DMEPOS bond is required for each competitive bidding area (CBA) in which a business location operates. So if a business has multiple locations in different CBA’s, they will need to purchase multiple DMEPOS bonds for each location in different CBA’s. Currently there are 130 bidding areas with sixteen different product categories. Bidding for each category has an open period to bid for specific categories in certain areas. Round 2021 is currently closed.

Hard Market vs. Soft Market: Impacts on Surety Bond Industry

For the last 15 years, the surety industry has flourished in the soft market. The soft market has allowed for ample competition, innovative submission platforms, higher bonding limits, and increased profits. A hard market, relative to the insurance industry is when there is a high demand for insurance coverage and a reduced supply. Profits are lower and claim payouts are higher and more frequent. This leads to an increase in premium amounts, strict underwriting, less competition, and fewer bonds being written. A soft market exists when there is ample competition among insurance carriers. More competition leads to lower premiums, more lenient underwriting criteria, and more high-risk bonds being written.

Despite an increase of competition and capacity, nationwide recessions, global pandemics, and natural catastrophes and disasters can force the market to transition from a soft to a hard market. Impacts of COVID-19 have thrust the surety industry into a hard market. As the impacts of COVID-19 are felt, the surety industry quickly adapted to allow for more electronically sealed and executed bonds. This adaptation has paired well with most surety brokers and producers having an electronic platform integrated into their business model.  As the soft market transitions into a hard market, online platforms with “instant” quotes will become more challenging. Success in the surety producing sector will boil down to pure experience and knowledge of each carrier’s appetites, underwriting criteria, and specific risks attributed to each type of bond. The thinning of competition among surety producers and agents has already begun. What can be done in order to thrive in a hard market?

Surety agents should prepare their contractors for the inevitable hard market. The transition will be less harsh when expectations are properly adjusted. Agents should discuss with their contractors the implications of stricter underwriting criteria, decreased bonding capacities, and higher premium rates. Contractors who are able to identify the scopes of work that are most profitable to them will be able to weather economic hardships. For example, if a contractor who performs mechanical and plumbing work does not have a sheet metal shot, they may elect to pursue more plumbing jobs and new mechanical projects. Having to purchase sheet metal from a supplier would make renovations and projects involving ductwork less profitable.

Commercial and financial guarantee bonds will now require personal and business financials to accompany the applications. Performing a soft pull on a business owner’s credit will no longer suffice for some of the more risky bonds, especially in those industries who have been directly impacted by COVID-19, such as health spas and motor vehicle dealerships. This will create more front end work for insurance agents and surety producers as they must request additional documentation of their clients.

Knowing each surety carrier’s underwriting criteria and appetites will be the advantage in thriving in a hard market. Establishing realistic expectations for underwriting procedures, preparing clients for increased premium rates, and knowing the markets are the keys to excelling in a hard market. It’s time to have those difficult conversations with clients; get to know your surety’s underwriting criteria and prepare for a more in-depth application process.

Court Bonds

There are four main types of surety bonds; commercial bonds, contract bonds, court bonds, and fidelity bonds. Court bonds are not as common as commercial or contract bonds, and there are various different types of court bonds. The two main categories of court bonds are judicial bonds and probate bonds. Judicial bonds require a Principal (person required to purchase the bond) to pay a sum of money. Probate bonds require a Principal to perform duties as the laws and courts require.

Judicial bonds are required by a civil court in order to secure funds or assets. They are very difficult to underwrite, as evaluating the result of a court proceeding is rather difficult. The outcome will determine if there is a likelihood of a loss or bonds claim. These types of bonds will often come with a premium and additional collateral requirements. Premiums will not be returned, but if the bond does not have any claims, the collateral will be returned to the Principal after the obligations are fulfilled. There are many different types of judicial bonds including:

  • Replevin Bonds – Replevin bonds are required when a plaintiff is recovering property from a defendant. Courts may require the plaintiff to purchase a replevin bond if the property is returned to the plaintiff before a settlement is reached. This is to protect the defendant’s interests if they were to win the case and have any damages to the property.
  • Injunction Bonds – Injunction bonds are required to prevent a defendant from performing certain acts, such as a restraining order of an employer from an employee. While the court case is being conducted, the plaintiff may be required to purchase a bond in case the court favors the defendant. If the defendant suffers damages from an injunction that prevented them from working (as described above) they may make a claim on the bond.
  • Attachment Bonds – Attachment bonds are purchased by the plaintiff who is often a creditor when a debtor’s property is seized. This ensures that if the court rules in favor of the debtor, the creditor will pay all legal costs and damages suffered by the defendant.
  • Indemnity to Sheriff Bonds – These bonds are used to protect Sheriffs or other law enforcement officers if a court case requires the seizure of the defendant’s personal property by a plaintiff. If an investigation into personal property must be performed by a sheriff, a court can require an indemnity to sheriff bond be purchased by the plaintiff. These bonds protect the Sheriff from any losses or damages incurred while performing the seizure of personal property or being sued.

Probate bonds can also be referred to as fiduciary bonds. A fiduciary is a person or entity that has been granted power over another’s assets and well-being, by a court. A probate bond will be required by a court if an individual or entity is to care for another’s assets or well-being. This subcategory of court bonds includes the following specific bonds:

  • Administrator Bond – An administrator bond is required in the event that a will does not name an executor to ensure the will is carried out as intended.
  • Executor Bond – An executor bond protects the estate and management of assets contained in a will from being mismanaged by the executor of a will. Most probate courts will require this if an executor resides in a different state than the deceased who created the will.
  • Guardianship Bond – A guardianship bond is also referred to as “custodian bond”. A probate court will require a guardian of a minor, elderly person, or disabled persons to post a guardianship bond. This bond ensures that the level of care set by the court is followed.
  • Conservatorship Bond – A conservatorship bond protects the assets of an elderly, minor, or disabled persons’ assets. This is similar to a guardianship bond, except the monetary assets are being protected versus the actual care of the individual.
  • Trustee Bonds – Trustee bonds are similar to executor bonds, but the trustee bond guarantees that the interests of the trust are carried out as the guidelines that were established by the beneficiary.

13 Unusual Surety Bonds

There are over 11,000 different types of surety bonds, which anyone from a general contractor to the federal government could be required to purchase. Some bonds are well-known and quite common such as a bid bond, motor vehicle dealer bond, or probate bond. However, there are many less unknown bonds and in fact, anyone can create their own surety bond requirement. Here are just a few of the unusual surety bonds available:

  1. Wisconsin Moped Dealer Bond – Required by the Wisconsin Department of Transportation in order to obtain and maintain a license to sell mopeds.
  2. Private Detective Bond – Required by various states in order for private detectives or private detective agencies to obtain a license.
  3. Alabama Dog Bite Bond – On March 8th, 2018 Alabama signed Emily’s Law. Emily’s law requires owners of dangerous dogs to purchase a surety bond of no less than $100,000.
  4. Buying Club Bond – Operators of buying clubs must purchase a type of financial guarantee bond to protect clients of the club from damages resulting from illegal activity.
  5. Car Wash Bond – In various states, owners of car washes or car spa establishments must purchase a surety bond to ensure proper wages are paid to their employees. This bond is required by state labor departments.
  6. Bingo Bonds – Various states require entities operating bingo games to purchase a surety bond to ensure that all taxes, revenues, and payouts are paid.
  7. Boxing Promoter Bonds – Various states require boxing event promoters to purchase a surety bond in order to ensure that participants are paid.
  8. Driving School Bonds – Third-party administrators of driving schools must purchase a surety bond in order to obtain a business license. Driving school bonds are also known as third party administrator bonds and are required in various states.
  9. Cannabis & Marijuana Bonds – While cannabis and marijuana may not be federally legal, numerous states have now legalized both medical and recreational sales and use. Various states and cities require retailers and manufacturers to purchase license bonds and excise tax bonds to ensure business owners pay their taxes and abide by regulations.
  10. Dog Breeder Bonds – The state of Ohio requires dog breeders to purchase a bond to ensure that all regulations and laws are followed. A customer of the breeder may make a claim on the bond if they find the business has violated any laws or made any misrepresentations.
  11. Amusement Enterprise Bond – Amusement parks in Louisiana must obtain a surety bond to ensure they keep their carnival rides safe and abide by all state regulations and laws.
  12. Florida Venomous Reptile Bond – The Florida Fish and Wildlife Conservation Commission requires individuals possessing or entities who exhibit venomous reptiles to purchase a $10,000 surety bond. This bond is required to ensure that venomous reptiles are captured and exhibited properly.
  13. Cemetery Bonds – Owners of property that is used as a cemetery must obtain a bond to ensure the property is maintained and that nothing happens to the graves. These bonds are required in various states and vary in bond amounts.

Surety Bond Renewals

Renewing a surety bond can be a complicated endeavor. Renewal invoices are sent 30 to 90 days prior to the bond’s expiration date. The language of each surety bond contains a cancellation clause that specifically states how much advance notice bonding companies are required to give the principal and obligee prior to the bonds expiration date. Most cancellation clauses require notification to be delivered in writing either 30, 60, or 90 days prior to expiration.

When a bond is renewed, the documentation provided will vary depending on the specific bond. Some bonds are continuous and require no new documentation, only payment.  When a bond has a fixed term end date, typically an entirely new bond is required by the obligee. Others may indicate that a continuation certificate is required at the time of renewal. This can be in the form of a rider amending the term for the next year or a specific continuation certificate. Some bonds do not renew or do not need to be purchased for longer than the initial term.

Knowing when a bond expires can also be tricky. Bonds can have a one-year term or can be issued for multiple years. Some bonds expire one year after they were issued while others expire on specific dates no matter when they were first issued. For example, a car dealer in Georgia obtaining a license for the first time in January of 2020 will need to purchase a bond for a term of January 2020 to 3/31/20. Then in March, the bond must be renewed for a term of 04/01/2020 to 03/31/2022, as all Georgia Motor Vehicle Dealership bonds must expire on 03/31 of even-numbered years.  Below is a list of bonds that have specific expiration dates.

January

01/31 – New Jersey Bugler, Fire and Locksmith Bond

February

02/28 – Illinois Irrigation Contractor Bond

March

03/31 – Georgia Used Motor Vehicle Dealer Bond

03/31 – Michigan City of Burton Watermain Installer Bond

03/31 – Michigan City of Burton Sewer Digger Bond

03/31 – New Jersey Motor Vehicle Dealer Bond

03/31 – New Mexico Motor Vehicle Dealer Bond

03/31 – New Mexico Auto Recycler Bond

03/31 – New Mexico Barber Cosmetology School Bond

03/31 – New Mexico Fruit and Vegetable Packer/Shipper Bond

03/31 – Ohio Professional Solicitor Bond

April

04/30 – Florida MVD Bond

04/30 – Ohio Mortgage Broker Bond

04/30 – Ohio Fundraising Bond

May

05/31 – Texas City of Houston Sidewalk, Driveway, Curb and Gutter Builders Bond

05/31 – Maryland Fuel Dealer Bond

June

06/01 – Florida Talent Agent Bond

06/30 – Michigan Mortgage Broker Bond

06/30 – Mississippi Mortgage Broker Bond

06/30 – West Virginia Motor Vehicle Dealer Bond

06/30 – Michigan Fundraising Bond

06/30 – New Jersey Fundraising Bond

July

07/01 – North Carolina Collection Agency Bond

07/01 – Missouri Combat Sport Promoter Bond

07/01 – Kansas Combat Sport Promoter Bond

07/01 – Colorado Medical Marijuana Bond

August

08/31 – Texas Superheavy/Oversize Permit Bond

September

09/01 – North Dakota Fundraising Bond

09/30 – Alabama Auto Dealer Bond

09/30 – Illinois Plumbing Contractor Bond

09/30 – Alabama Fundraising Bond

09/30 – Texas U.A Plumbers Local Union 68 Wage and Welfare Bond

October

10/31 – Pennsylvania Real Estate Commission Real Estate Education Provider Bond

November

11/30 – D.C. Master Electrician Bond

11/30 – D. C. Electrical Contractor Bond

11/30 – Rhode Island City of East Providence Private Detective Bond

December

12/31 – Alabama City of Auburn Mortgage Broker Bond

12/31 – Alabama City of Auburn Electrician Bond

12/31 – Alabama Nonresident Contractor Bond

12/31 – Alabama City of Cheshire Street Excavation Bond

12/31 – Alabama City of Fairfield Occupational License or Permit Bond

12/31 – Alabama City of Hamden Occupational License or Permit Bond

12/31 – Colorado Denver Merchant Guard Company Surety Bond

12/31 – Connecticut City of Hartford Occupational License or Permit Bond

12/31 – Connecticut city of Milford Occupational License or Permit Bond

12/31 – Connecticut City of Newington Drain Layer Bond

12/31 – Connecticut City of Norwalk Drain Layer Bond

12/31 – Connecticut City of Wallingford Excavation Contractor

12/31 – Connecticut City of West Hartford Curb and Walk Layer Bond

12/31 – Connecticut City of West Hartford Drain Layer Bond

12/31 – Connecticut City of Wethersfield Street Excavation Bond

12/31 – Connecticut City of Wethersfield Drain Layer Bond

12/31 – Connecticut City of Wethersfield Curb and Walk Layer Bond

12/31 – Connecticut Motor Vehicle Dealer Bond

12/31 – Connecticut Used Car Lot Bond

12/31 – D.C. Mortgage, Transmitter, Finance, Lender or Check Casher Surety Bond

12/31 – Florida Franchised Motor Vehicle Dealer Bond

12/31 – Georgia Liquor Manufacturer Distillery Tax Bond

12/31 – Illinois Designated Agent Bond

12/31 – Illinois Payday Loan Reform Bond

12/31 – Illinois Remittance Agent Surety Bond

12/31 – Illinois Residential Mortgage License Surety Bond

12/31 – Indiana Mortgage Broker Bond

12/31 – Louisiana Auctioneer Bond

12/31 – Louisiana Motor Vehicle Dealer Bond

12/31 – Massachusetts Liquor License Surety Bond

12/31 – Massachusetts Professional Solicitor and Commercial Co-Venturer Surety Bond

12/31 – Michigan Mortgage Loan Originator Bond

12/31 – Michigan Secondary Mortgage Bond

12/31 – Missouri Auto Dealer Bond

12/31 – Montana Auto Dealer Bond

12/31 – Nebraska collection Agency License Bond

12/31 – Nebraska Motor Vehicle, Trailer, Wholesale or Motorcycle Dealer Bond

12/31 – Ohio County of Hamilton Installation/Repair Plumbing Performance Bond

12/31 – Ohio City of Lima Electrical Contractor Bond

12/31 – Ohio City of Lyndhurst HVAC Bond

12/31 – Ohio City of Maple Heights Occupational License or Permit Bond

12/31 – Ohio City of Mentor Certificate of Registration

12/31 – Ohio City of Mentor Electrical

12/31 – Ohio County Montgomery HVAC

12/31 – Ohio Village of Moreland Hills Occupational License or Permit Bond

12/31 – Ohio City of North Ridgeville Contractor Bond

12/31 – Ohio City of North Royalton Contractor Performance Bond

12/31 – Ohio City of Oakwood City Cement License Bond

12/31 – Ohio Township of Olmsted Contractors Registration Bond

12/31 – Ohio City of Oregon  Sidewalk and Driveway Contractor Bond

12/31 – Ohio City of Parma Contractor Bond

12/31 – Ohio City of Pepper Pike Occupational License or Permit Bond

12/31 – Ohio City of Perrysburg Sidewalk Contractor Bond

12/31 – Ohio County of Pickaway Contractor / Sub-contractor Registration Bond

12/31 – Ohio County of Portage Contractor Bond

12/31 – Ohio City of Reminderville Contractor Bond

12/31 – Ohio City of Reynoldsburg Contractor’s Registration Bond

12/31 – Ohio City of Seven Hills General Contractors Bond

12/31 – Ohio City of Shaker Heights Occupational License or Permit Bond

12/31 – Ohio City of Solon Contractor Registration Bond

12/31 – Ohio City of South Euclid Contractor Registration Bond

12/31 – Ohio City of Springfield Home Improvement Bond

12/31 – Ohio City of Toledo Plumbers Indemnity Bond

12/31 – Ohio County of Trumbull Electrical Contractor Bond

12/31 – Ohio County of Trumbull Mechanical Contractor Bond

12/31 – Ohio City of Twinsburg Contractor Registration Bond

12/31 – Ohio City of University Heights Contractor’s License Bond

12/31 – Ohio County of Warren Plumbing Contractors Bond

12/31 – Ohio City of Warrensville Heights Occupational License or Permit Bond

12/31 – Ohio City of Westlake Occupational License or Permit Bond

12/31 – Ohio City of Wickliffe Contractor Registration Bond

12/31 – Ohio City of Willoughby – City HVAC/Refrigeration Bond

12/31 – Ohio City of Willoughby Hills – City Occupational License or Permit Bond

12/31 – Ohio City of Willowick Contractor Registration Bond

12/31 – Ohio County of Wood (Northwestern Water & Sewer District) Sewer Tapper Bond

12/31 – Oklahoma Auto Dealer Bond

12/31 – Rhode Island Motor Vehicle Dealer Bond

12/31 – Rhode Island City of Providence Side Walk Bond

12/31 – Tennessee Dealer of Manufactured Home Bond

12/31 – Texas Fuel Tax Bond

12/31 – Texas Continuous Bond of Seller Sales Tax Bond

12/31 – Texas Bingo Gross Receipts Bond

12/31 – Texas Mortgage Broker, Lender or Servicer Bond

12/31 – Texas City of San Antonio Master Electrician Bond

12/31 – Texas Mixed Beverage Receipts Tax Bond

12/31 – Texas Residential Mortgage Loan Services Bond

12/31 – Texas License to Conduct Bingo Bond

12/31 – Texas City of Kerrville Contractor License Bond

12/31 – Texas City of Kirby Home Improvement Contractor/Salesman Bond

12/31 – Texas City of Antonio Sidewalks, Curbs, Cutter and Driveway Bond

12/31 – Texas City of Antonio Home Improvement Bond

12/31 – Texas City of Dallas Paving Bond

12/31 – Virginia County of Fairfax Home Improvement Contractor Bond

12/31 – West Virginia Motor Vehicle License Service Bond

The Three Parties of Surety Bonds

Working with surety bonds involves using unique terminology. Despite surety being lumped into the insurance sector, even insurance agents need a translator to navigate through the bonding process. The three parties to a surety bond are the Obligee, Principal, and Surety.

Obligee

This is the entity that is requiring the principal to be bonded. Often times this is a government entity, such a Department of Motor Vehicles for commercial bonds or a general contractor for contract bonds.

Example: A cosmetology school must be bonded. Halfway through the semester the cosmetology school goes bankrupt and must close. The bond protects the students and their pre-paid tuition. Students can make a claim on the bond to be reimbursed. The surety will pay the claim and then look to the individuals who own the business to be made whole on the full amount of the bond claim.

Principal

The person or business required to be bonded by the obligee. The Principal must purchase a bond from a licensed insurance agent or surety bond broker and abide by the obligations stated on the bond form. The Principal is in a position where their decisions may cause harm to consumers of their business or to entities required to maintain oversight and regulation – such as a state or local government. Therefore they are required to be bonded.

Example: Cosmetology schools, car dealers, contractors, mortgage brokers, freight brokers, health studios and even an executor of a will are examples of bond principals.

Surety

The Surety is an entity providing a line of credit guaranteeing the compliance or performance of a specific obligation, contract, or law. The surety underwrites the principal during the application process to ensure zero losses. Unlike insurance, surety bonds are written with the expectation of zero losses. Also unlike insurance, if a claim is made the surety will pay the claim if proven valid. The surety will then look to the principal to reimburse the surety for the full claim amount. This is why indemnities require a signature from the business and a signature from the business owners.

ERISA Bonds

Employee Retirement Income Security Act (ERISA) bonds are required for sponsors or employers who manage employee retirement accounts such as 401(k), 403(b), or pension plans. An ERISA bond is a type of fidelity bond that protects benefit plan participants from loss due to fraud or dishonesty, such as embezzlement or fraud. According to ERISA, a company must have a bond amounting to no less than 10 percent of the value of the plan, up to a maximum bond amount of $500,000. Every individual, sponsor, or “fiduciary” who handles the retirement plan, must be bonded.

ERISA Bond Rates for 3-Year Term:

Policy Limit Premium (3-Year Term)
$10,000 $100
$50,000 $162
$150,000 $263
$200,000 $290
$300,000 $344
$400,000 $398
$500,000 $450

Crime Policies and the Bonds They Cover

Crime insurance policies are often referred to as fidelity insurance, employee dishonesty bonds, or business service bonds. Crime coverage is a relatively new insurance policy that satisfies requirements the following bonds:

Fidelity Insurance

Companies often purchase fidelity insurance in addition to an ERISA bond. This coverage is optional and protects the assets of the company’s retirement plan against an employee’s actions that inadvertently cause harm to the plan’s assets. An employee acting in good faith may misinterpret regulations overseeing the retirement plan, which may result in penalties or fees being assessed to the plan. Acts in good faith and are not acts of dishonesty or fraud, they are not covered under an ERISA bond.

Employee Dishonesty Bond

While an ERISA bond is a type of fidelity bond, there are other types of fidelity bonds that are unrelated to retirement accounts, such as an employee dishonesty bond. Employee Dishonesty bonds protect your company against this type of employee theft. Examples of employee theft are embezzling money, forging checks, stealing cash, cyber fraud, and theft of merchandise or company equipment.

Business Service Bond

Business services bonds are purchased by business owners with employees who primarily work at the location of their clients. Examples of businesses that may need a business service bond are janitorial services, maids or cleaning services, gardeners, exterminators, pool cleaners, security services, carpet cleaners, painters, locksmiths, movers, pet-sitters, plumbers, and appliance repair technicians. Business service bonds protect their clients from any theft resulting from a malicious act of their employees, such as stealing and theft.

Surety Bonds vs. Insurance

The distinction between insurance and surety bonds isn’t always clear, so we’ve created a visual showing the differences and similarities between the two.

Insurance-vs-Bonds_Venn-Diagram_01

The surety and insurance industries use the same concepts when placing business, but use different terms to describe each concept. Here are some of the most common surety terms translated for the insurance industry.

Surety Term Insurance Term
Principal Insured
Surety Insurer
Rider Endorsement
Execution Binder
Bond Certificate of Insurance
Penalty Coverage Amount

The Three Types of Surety Bonds

There are three main types of surety bonds; commercial, contract, and court bonds. Within each of the three types, there are numerous subcategories. The following will provide a general overview of the three main types. All surety bonds are three-party agreements between a principal, obligee, and surety company. However, the purpose as to why these bonds are required varies between bond types.

Commercial Bonds

Local, state, and federal government agencies require commercial bonds for businesses in certain industries. Commercial bonds are required to be purchased before the business can legally be licensed. These bonds are also referred to as “license and permit bonds”. The bonds require that business owners abide by laws and regulations enforced to ensure consumers are not harmed by the business owner’s unlawful acts. These bonds also ensure that the bills and fees will be paid on time, such as utility bills, taxes, employee wages, etc.

Examples of commercial bonds are motor vehicle dealership bonds, freight broker bonds (BMC 84), DMEPOS (Durable Medical Equipment, Prosthetics, Orthotics, and Supplies), notary bonds, contractor license bonds, and marijuana bonds

Court Bonds

There are two subcategories of court bonds- judicial/civil and probate/fiduciary. Judicial/Civil court bonds are required when a court proceeding informs certain parties they must get a specific bond in order to verify their financial and personal integrity. A judicial court bond denies all uncertainties within court proceedings which would lead to losses resulted from a ruling. Fiduciary or probate bonds are required for an individual that is appointed to care for someone else that is either a minor or incompetent to care for themselves. These individuals are appointed by the court to handle assets and the care of a person who cannot do so themselves.

Examples of judicial court bonds are appeal bonds and the plaintiff’s attachment bonds. Examples of fiduciary or probate bonds include guardianship bonds, custodian bonds, executor bonds, and VA bonds.

Contract Bonds

Contract bonds guarantee that only qualified contractors or sub-contractors are able to bid and perform work on construction projects. The Obligee is typically a construction project owner that can be a government entity for public projects or a private property owner.

Examples of contract bonds are bid bonds, payment bonds, performance bonds, and supply bonds.

Impacts of COVID-19 on the Surety Industry: Surety Bonds Essential Businesses Still Need

Local, state, and federal stay-at-home orders have a huge impact on the surety industry. Numerous articles have been popping up addressing the effects of COVID-19 on the contract surety industry. What about the commercial and court bonds? Understanding what business industries are deemed essential and the bond requirements can better prepare carriers, agents, and brokers to adapt to the volatile reality that is living through a pandemic. Numerous state and local governments are quickly adapting to electronic licensing procedures, meaning that various license requirements are not exempt during the current pandemic.

essential critical infrastructure workers

Source: Essential Critical Infrastructures defined by the CISA

On March 28th, the U.S. Department of Homeland Security, Cybersecurity & Infrastructure Security Agency has produced an advisory list of essential critical infrastructures which can be found here. The purpose of this list is to give state and local officials guidance when establishing what constitutes essential infrastructure in hopes of softening the impacts of COVID-19 to the overall health, safety and economy of our nation.

Bonds relevant to these essential infrastructure sectors may include:

  • Agricultural bonds
  • Appraisal Management Company Bonds
  • Bid bonds
  • Cannabis Bonds
  • Conservatorship Bonds
  • Contractor’s Bond of Qualifying Individual
  • Contractor’s License Bonds
  • Department of Defense Hauling Bonds
  • Driver Training School Bonds
  • Executor Bonds
  • Excise Tax Bonds
  • Farm Labor Contractor Bonds
  • Freight Broker Bonds
  • Healthcare Administration Bonds
  • Home Healthcare Agency Bonds
  • Investment Advisor Bonds
  • Immigration Consultant Bonds
  • Insurance Agent/Surplus Lines Bonds
  • Liquor/Beer Tax Bonds
  • LLC Employee Worker Bond
  • Lost Securities Bonds
  • Lottery Bond
  • Marijuana Excise Tax Bond
  • Medicaid Provider Bond
  • Money Transmitter Bonds
  • Mortgage Broker Bonds
  • Motor Vehicle Dealership Bonds
  • Oil and Gas industry bonds
  • Performance and Payment Bonds
  • Probate bonds
  • Public Official Bonds
  • Sales Tax Bonds
  • Site Development Bonds
  • Telemarketing/Professional Fundraiser Bonds
  • Third-Party Debt Collector Surety Bond
  • Title Agent Bonds
  • S. Customs Bonds
  • Utility Deposit Bonds
  • Wage, Welfare and Fringe Benefit Bonds
  • Weighmaster Bonds

COVID-19 Pandemic Sparks Innovation in the Surety Industry

On Monday, April 6th, 2020 the Surety & Fidelity Association of America (SFAA) and the National Association of Surety Bond Producers (NASBP) issued a joint Request for Emergency Action to federal, state, and local municipalities to accept the electronic execution and delivery of commercial and contract surety bonds.  Many contract surety bonds still require raised seals, which can be a challenge given the current pandemic requiring many in the surety industry to work remotely.

It is imperative to adopt a new standard that allows for the electronic execution of bonds, as many construction projects are infrastructure related to health and safety. The joint request memo urges officials to adopt the following:

  1. With respect to all construction bonds, public procurement officials shall accept all bonds and powers of attorney containing e-signatures and e-corporate seals affixed to each document, and waive the notary requirement.
  2. With respect to all commercial surety bonds, government officials shall accept all bonds and powers of attorney containing e-signatures and e-corporate seals affixed to each document, and waive the notary requirement.

Numerous sureties have quickly adapted to the current pandemic by creating electronic powers of attorney and electronic seals. Software programs have also enabled contractors to submit bid proposals online, with electronic bid bonds. Many license and permit bond requirements have evolved in recent years to allow for electronic execution.

The SFAA and the NASBP have combined their resources to create an immediate request for the adaptation of electronic execution of surety bonds. The joint request has addressed federal and state laws FAR 28.106-1 & GSAR 528.2020 and requested that they are amended to accommodate the current pandemic. If amended this would promote a more conducive and efficient method of bond executions that would be beneficial in the current crisis. This would also mark a significant adaptation in the surety industry. Shipping costs would be eliminated, overhead costs would be reduced and overall efficiency would create a more streamlined process of purchasing bonds.

Force Majeure and Contract Bond Claims Due to COVID-19 Impacts

Impacts stemming from COVID-19 are felt in every aspect of life. The surety industry is no different. Different types of surety bonds will be affected in different ways. Understanding the indirect effects of how COVID-19 affects the contract surety industry can help surety carriers, surety producers, and contractors mitigate risks and soften the blow.

Numerous articles have popped up outlining how Force Majeure clauses may be utilized for project delays leading to potential surety claims related to the COVID-19 pandemic. Force Majeure is a contract clause that excuses the performance of a construction contract due to uncontrollable events. Not all construction contracts will contain a Force Majeure clause covering COVID-19 or viruses. The most common performance and payment bond form from the American Institute of Architects outlines delays and extensions of time in their Performance and Payment bond form (AIA Document A201-2007) in Article 8, section 3.1.

Force Majeure is not a “cure-all” that sureties and contractors can rely on to keep from being responsible for bond claims resulting from completion date delays due to COVID-19 impacts. Force Majeure clauses may not exist in all performance and payment bond form language. It’s also possible that contract amendments removing force majeure clauses may have been removed if mutually agreed upon prior to signing a contract. There’s also Burden of Proof that comes into play where it must be proven that is impacts from COVID-19 have made completing the project impossible, not impractical or unprofitable.

Alternative Solutions Outside of Force Majeure

There are several options beyond Force Majeure. First, open communication between all parties, including the project owner, general contractor, suppliers, vendors, subcontractors, and sureties is essential. Always consider renegotiations and change orders when it comes to the initial parties involved. Next, there is the Good Faith Attempt to Perform and other regulations that can be used, below:

  • The Doctrine of Impossibility/Impracticability – 30 Williston on Contracts § 77:31 (4th ed.) that states:

“A contracting party has no duty to perform an obligation in the agreement if performance is rendered impossible or impracticable, through no fault of its own, because of a fact that existed at the time when a contract was made and about which this party neither knew nor had reason to know, and the nonexistence of which was a basic assumption of the parties’ agreement.”

  • Default under Federal Contracts – FAR § 52.249‐10‐ Default that reads:

“(b) The Contractor’s right to proceed shall not be terminated nor the Contractor charged with damages under this clause, if ‐ (1) The delay in completing the work arises from unforeseeable causes beyond the control and without the fault or negligence of the Contractor. Examples of such causes include (i) acts of God or of the public enemy, (ii) acts of the Government in either its sovereign or contractual capacity, (iii) acts of another Contractor in the performance of a contract with the Government, (iv) fires, (v) floods, (vi) epidemics, (vii) quarantine restrictions, (viii) strikes, (ix) freight embargoes, (x) unusually severe weather, or (xi) delays of subcontractors or suppliers at any tier arising from unforeseeable causes beyond the control and without the fault or negligence of both the Contractor and the subcontractors or suppliers; and…”

  • Excusable delays involving federal contracts – FAR § 52.249‐14 states:

(a) Except for defaults of subcontractors at any tier, the Contractor shall not be in default because of any failure to perform this contract under its terms if the failure arises from causes beyond the control and without the fault or negligence of the Contractor. Examples of these causes are (1) acts of God or of the public enemy, (2) acts of the Government in either its sovereign or contractual capacity, (3) fires, (4) floods, (5) epidemics, (6) quarantine restrictions, (7) strikes, (8) freight embargoes, and (9) unusually severe weather. In each instance, the failure to perform must be beyond the control and without the fault or negligence of the Contractor. Default includes failure to make progress in the work so as to endanger performance….”

Construction is currently considered an essential business by the majority of states, as this industry is a driving force in the economic health of our country. This does not apply to all states and local jurisdictions, and may change from day to day. Construction is even considered an exemption under the California Executive Order N-33-20. Being deemed an essential business exempt from executive stay-at-home orders does not shield the construction industry from the impacts of COVID-19. If a bonded project comes to a halt, sureties may face claims due to delayed completion of projects. Now is the time to be proactive and have those difficult conversations.