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.

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.

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.