Agent’s Guide to the SBA Surety Bond Program

What is the SBA Surety Bond Program?

The SBA’s Surety Bond Guarantee Program helps small contractors, who would otherwise not be approved by a Surety company, obtain bonding. This program provides an outlet for these contractors to obtain a bonding line for projects up to $6.5M by providing a guarantee to the surety company for up to 90% of the liability on the contract.

The Bond Exchange is uniquely positioned to help insurance agents access the Surety Bond Guarantee Program for their contractor customers by providing the expertise necessary to efficiently navigate the government program requirements.

What is the Small Business Administration

The Small Business Administration (“SBA”) is an independent agency of the federal government. A by-product of the Great Depression era Reconstruction Finance Corporation (“RFC”), the SBA was created in 1953 to aid, counsel, assist and protect the interests of small businesses.

How does the SBA Surety Bond program work?

The SBA’s Surety Bond Program provides a guarantee to surety companies that write surety bonds for contractors under the program that the SBA will pay for up to 90% of losses incurred on those bonds. The reduced liability allows surety companies to offer surety bonds to contractors that would otherwise not qualify for a bond.

To qualify for a contract surety bond, contractors provide information to the surety company to demonstrate their ability to complete the contract as expected. The information requested varies depending on the type of work to be performed and the size of the contract. The SBA surety bond program helps contractors who do not meet these minimum requirements obtain approval.

How much does the SBA Surety bond program cost?

Contract surety bond premiums typically cost between 1% – 3% of the contract amount, which is due to the surety company when a contractor is awarded a contract and needs a payment and performance bond. The SBA charges a fee of 0.729% of the contract price, in addition to the premium, which is due before the bond may be issued.

There is no cost to apply for the SBA guarantee and The Bond Exchange does not charge fees for bid bonds.

Example: $500,000 SBA Contract Bond Cost Calculation

Bond Amount Premium Rate Bond Cost
First $100,000 2.5% $2,500
Next $400,000 1.5% $6,000
SBA Fee 0.729% $3,645

Total cost of $12,145

How do contractors get approved for the SBA?

Contractors can apply to an authorized SBA surety bond agency to get approved for the SBA surety bond program. To qualify for the program, the contractor must meet the following requirements based on the size of the contract:

Minimum requirements​ ​for​ ​contracts​ ​up​ ​to​ ​$400,000​ ​​ ​(“SBA​ ​Quick Program”)

  • No​ ​tax​ ​liens
  • No​ ​open​ ​bankruptcies
  • No​ ​criminal​ ​convictions​ ​or​ ​pending​ ​charges
  • No​ ​past​ ​due​ ​child​ ​support
  • No​ ​maintenance​ ​clauses​ ​greater​ ​than​ ​2​ ​years
  • No​ ​liquidated​ ​damages​ ​clause​ ​greater​ ​than​ ​$1,000​ ​per​ ​day
  • Applicant​ ​must​ ​be​ ​performing​ ​at​ ​least​ ​20%​ ​of​ ​the​ ​work
  • Work​ ​cannot​ ​be​ ​more​ ​than​ ​50%​ ​complete​ ​at​ ​the​ ​time​ ​of​ ​application
  • No​ ​asbestos,​ ​remediation,​ ​pool​ ​contractors,​ ​demolition,​ ​or​ ​software​ ​development
  • Bid​ ​spread​ ​cannot​ ​be​ ​larger​ ​than​ ​20%

Minimum requirements for projects over $400,000 (“SBA Full Program”):

  • All​ ​of​ ​the​ ​SBA​ ​Quick​ ​Program​ ​requirements
  • Suitable​ ​explanation​ ​of​ ​any​ ​settled​ ​judgments​ ​or​ ​lawsuits
  • No​ ​liquidated​ ​damages​ ​clause​ ​greater​ ​than​ ​$2,500​ ​per​ ​day
  • Working​ ​capital​ ​of​ ​at​ ​least​ ​5%​ ​of​ ​the​ ​current​ ​request​ ​plus​ ​the​ ​cost​ ​to​ ​complete​ ​existing​ ​work​ ​in progress
  • Contract​ ​amount​ ​limited​ ​to​ ​two​ ​times​ ​the​ ​largest​ ​prior​ ​contract​ ​in​ ​the​ ​same​ ​scope​ ​of​ ​work
  • Financial​ ​statements
    • Liability​ ​limits​ ​up​ ​to​ ​$1​ ​million:​ ​In-house​ ​financial​ ​statements
    • Liability​ ​limits​ ​up​ ​to​ ​$2​ ​million:​ ​CPA​ ​compilation​ ​OR​ ​in-house​ ​statements​ ​with​ ​bank references​ ​and​ ​AR​ ​aging​ ​schedules

Agent Guide to Florida Used Car Dealer Insurance Requirements

What are the insurance requirements for Florida auto dealers?

Florida used car dealers must submit an original $25,000 surety bond and proof of garage liability insurance (minimum of $25k combined single-limit liability coverage including bodily injury and property damage and $10k personal injury protection) with their license renewal every year by April 30th.

How can an insurance agent obtain the surety bond for Florida car dealer customers?

Florida insurance agents have trusted the Bond Exchange for more than 40 years to obtain car dealer bonds for their customers. The Bond Exchange works with over 30 carriers to ensure your customer receives the best price in the market, all with a single point of entry with most quotes provided instantly online. We also offer easy no-interest financing with up to 10 monthly payments, helping you deliver payment terms for all situations. Enroll with us today by clicking here.

How can an insurance agent obtain garage liability insurance for Florida car dealer customers?

Bonds are our only business at The Bond Exchange. Our agents often utilize brokers for this specialty line of business. A list of brokers in this space can be found at https://www.mynewmarkets.com/search/garage+liability+fl

How much does the Florida Used Motor Vehicle Dealer bond cost?

Florida car dealer bonds cost between $175 and $2,250 for the 1 year term depending on the personal credit of the dealer, license history, and years of experience.

 

Credit Range Bond Cost
750 or higher $175
700 – 749 $220
650 – 699 $250
625 – 649 $375
600 – 624 $500
575 – 599 $750
550 – 574 $1,250
475 – 549 $1,875
474 or lower $2,250

 

Why is the Florida Used Motor Vehicle Dealer bond required?

Dealers are required to purchase and file a $25,000 bond with the State of Florida Department of Highway Safety & Motor Vehicles (the “Obligee”) to activate or renew their license. The bond protects the Obligee, ensuring the public is compensated for damages resulting from a licensed auto dealer failing to comply with the provisions of licensing laws.

How does the Florida Used Motor Vehicle Dealer bond work?

Florida Used Motor Vehicle Dealers bonds must be issued by an insurance carrier admitted by the Florida Department of Insurance. The insurance company issuing any surety bond, such as the Florida Used Motor Vehicle Dealers bond, will also be referred to as the “surety company” or the “bond company”. The car dealer is referred to as the Principal, the surety bond company as the Obligor and the State of Florida Department of Highway Safety & Motor Vehicles as the Obligee.

The surety company provides the Obligee a guarantee (the surety bond) that the customers, vendors and employees of a licensed business will receive payment for financial damages due to a violation of licensing law up the bond amount of $25,000, as stated on the bond form (“penal sum”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, licensed auto dealers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face license revocation.

Common examples of license violations triggering a bond payout include a car dealer bouncing a check at auction or failing to deliver proper title to a purchaser.

What information must be shown on the Garage Liability Certificate?

Florida car dealers must provide proof of garage liability insurance on an Acord form, with the following information:

  • Name and address of the garage liability insurance company;
  • Name, address, phone and fax number of the garage liability insurance agency
  • Name and address of the insured
  • Garage liability box must be checked
  • Policy number
  • Effective date of the policy
  • Expiration date of the policy
  • Name of the certificate holder which should read: Department of Highway Safety & Motor Vehicles, 2900 Apalachee Parkway, Room A312, MS# 65 Neil Kirkman Building, Tallahassee, Florida 32399.

 

 

 

Insurance Agent’s Guide to Georgia Auto Dealer Insurance Requirements

What are the insurance requirements for Georgia auto dealers?

Georgia used car dealers must submit an original $35,000 surety bond and proof of garage liability insurance (minimum of 50k/100k/25k or single limit of $125,000) with their license renewal every even year (2018, 2020, 2022,..) on March 31st. The surety bond must be effective for 2 years expiring at the next license renewal (3/31/2020).

How can an insurance agent obtain the surety bond for Georgia car dealer customers?

Georgia insurance agents have trusted the Bond Exchange for years to obtain car dealer bonds for customers in Georgia. The Bond Exchange works with over 30 carriers to ensure your customer receives the best price in the market, all with a single point of entry with most quotes provided instantly online. We also offer easy no-interest financing with up to 10 monthly payments, helping you deliver payment terms for all situations. Enroll with us today by clicking here.

How can an insurance agent obtain garage liability insurance for Georgia car dealer customers?

Bonds are our only business at The Bond Exchange. Our agents often utilize brokers for this specialty line of business. A list of brokers in this space can be found at https://www.mynewmarkets.com/search/garage+liability+ga

How much does the Georgia Motor Vehicle Dealer bond cost?

Georgia dealer bonds cost between $275 and $4,550 for the 2 year term depending on the personal credit of the dealer, license history, and years of experience.

Credit Score Premium Rate Bond Cost
800 or higher .75% $275
750-799 1.5% $525
700-749 1.75% $613
650-699 2.0% $700
625-649 3.0% $1,050
600-624 4.0% $1400
575-599 6.0% $2100
550-574 8.0% $2,800
525-549 10.0% $3,500
525 or lower 13.0% $4,550

Why is the Georgia Used Motor Vehicle Dealers bond required?

Dealers are required to purchase and file a $35,000 bond with the Georgia Board of Used Motor Vehicle Dealers (the “Obligee”) to activate or renew their license. The bond protects the Obligee, ensuring the public is compensated for damages resulting from the failure of a licensed auto dealer complying with the provisions of licensing laws.

How does the Georgia Used Motor Vehicle Dealers bond work?

Georgia Used Motor Vehicle Dealers bonds must be issued by an insurance carrier admitted by the Georgia Department of Insurance. The insurance company issuing any surety bond, such as the Georgia Used Motor Vehicle Dealers bond, will also be referred to as the “surety company” or the “bond company”. The car dealer is referred to as the Principal, the surety bond company as the Obligor and the Georgia Board of Used Motor Vehicle Dealers as the Obligee.

The surety company provides the Obligee a guarantee (the surety bond) that the customers, vendors and employees of a licensed business will receive payment for financial damages due to a violation of licensing law up the bond amount of $35,000, as stated on the bond form (“penal sum”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, licensed auto dealers are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face license revocation.

Common examples of license violations triggering a bond payout include a car dealer bouncing a check at auction or failing to deliver proper title to a purchaser.

What information must be shown on the Garage Liability Certificate?

Georgia car dealers must provide proof of garage liability insurance on an Acord form, with the following information:

  • Policy Number (Note, binders are not acceptable)
  • Limit Amounts – minimum of 50k/100k/25k, or a single limit of $125,000
  • Garage Liability Coverage must be shown. Automobile Liability Only will not be accepted.
  • “Location” on certificate must show exact name and address as shown on the license or application.
  • “Certificate Holder” must be “State Board of Used Motor Vehicle Dealers, 237 Coliseum Drive, Macon, GA. 31217”.

 

Hundreds of Surety Bonds Are Due for Renewal Between Now and the End of 2017. Is Your Customer’s One of Them?

Not all surety bonds expire on fixed dates; the vast majority expire one year after issuance. But with that said, there are a healthy number of licensing requirements for local, statewide, and even federal surety bonds that do expire on the same date every year, regardless of when the bond was issued.

And since we recommend beginning the surety bond renewal process well in advance of expiration (60-90 days if possible), there’s no time like the present to review those upcoming expirations that will impact your customers between now and the end of the year.

Tip: December is by far the busiest month for fixed surety bond renewals as many licenses expire with the end of the calendar year. If your customer has a bond that renews in December, it’s especially important to get started early. Bond providers and obligees often experience backlogs due to renewal congestion or shortened holiday hours.

See our 3 renewal tips for smooth and painless customer renewals

Bonds Expiring in September, October, November & December

STATE

OBLIGEE

BOND

EXPIRES

AL

Banking Department

Mortgage Broker

12/31

Auburn – City

Electrician

CT

Department of Revenue

Nonresident Contractor Verification

12/31

Cheshire – Township

Street Excavation

Fairfield – Township

Occupational License or Permit

Hamden – Township

Occupational License or Permit

Hartford – City

Occupational License or Permit

Milford – City

Occupational License or Permit

Newington – Township

Drain Layer

Norwalk – City

Sign Erector

Wallingford – Township

Excavation Contractor

West Hartford – Town

Curb and Walk Layer

Wethersfield – Township

Street Excavation, Drain Layer, Curb and Walk Layer

DC

Department of Consumer and Regulatory Affairs

Motor Vehicle Dealer or Used Car Lot Business

10/31

Occupational and Professional Licensing Administration

Private Detective Business

Department of Consumer and Regulatory Affairs

Electrical Contractor or Master Electrician

11/30

Department of Insurance Securities and Banking

Check Casher

12/31

DE

Department of Agriculture

Dealer in Agricultural Products

12/31

FL

Construction Industry Recovery Fund

Contractor License (Recovery Fund)

9/30

Department of Highway Safety & Motor Vehicles

Mobile Home and RV Dealers and Installers

Haines City – City

Occupational License or Permit

Jacksonville – City

Sign Contractor

Lake – County

Contractor’s License

Orange – County

Contractor Performance

Orlando – City

Contractor’s License or Permit

Osceola – County

Occupational License or Permit

Palm Beach – County

Occupational License or Permit

Sanford – City

Occupational License or Permit

Winter Park – City

Occupational License or Permit

Pasco – County

Contractor’s License

10/1

Department of Highway Safety & Motor Vehicles

Motor Vehicle Dealer (New/Franchise)

12/31

GA

Board of Registration Used Motor Vehicle Division

Used Motor Vehicle Parts Dealer

12/31

Department of Revenue

Alcohol / Liquor Tax

Department of Revenue

Nonresident Contractor’s Performance Tax

Professional Licensing Board

Paid Solicitor

Macon-Bibb – County

Retailer’s Malt Beverage and/or Wine

Monroe – County

Alcohol / Liquor Tax

Putnam – County

Retail Malt Beverage and/or Wine License

IL

Department of Public Health

Plumbing Contractor

9/30

Department of Vehicle Services

Second Division Motor Vehicles Installment

10/1

Department of Financial and Professional Regulation

Consumer Installment Loan

12/31

Department of Vehicle Services

Designated Agent / Motor Vehicle Dealer

Department of Vehicle Services

Remittance Agent

Chicago – City

Drain Layer

Cook – County

Demolition

Springfield – City

Occupational License or Permit

IN

Secretary of State

Loan Broker

12/31

Evansville / Vanderburgh – City / County

Occupational License or Permit

Indianapolis – City

General Contractor

Mishawaka – City

Excavation in Streets

Terre Haute – City

Contractor’s License or Permit

KS

Department of Education

Driver Training School Operator

12/31

Emporia – City

Occupational License or Permit

Winfield – City

Occupational License or Permit

KY

Office of the Attorney General

Professional Solicitor

12/31

LA

Auctioneers Licensing Board

Auctioneer

12/31

Used Motor Vehicle Commission

Used Motor Vehicle Dealer

Lake Charles – City

Contractors

MD

Commissioner of Financial Regulation

Collection Agency

12/31

Insurance Administration

Insurance Adviser

Baltimore – City

Master Electrician

Baltimore – County

Trespass Towing

Calvert – County

Sewage Disposal Installer

Hagerstown – City

Building Contractors and Carpenters

MA

Alcoholic Beverages Control Commission

Liquor License

12/31

Office of the Attorney General

Professional Solicitor

MI

Department of Licensing and Regulatory Affairs

Unemployment Compensation

12/31

Office of Financial and Insurance Regulation

Mortgage Broker or Lender

Detroit – City

Hauler of Extraordinary Loads: Class B

Department of Insurance and Financial Services

Money Transmission Services Provider

MO

Title and Registration Bureau

Motor Vehicle Dealer

12/31

MS

Department of Banking and Consumer Finance

Check Cashers

9/30

Tupelo – City

Occupational License or Permit

Department of Banking and Consumer Finance

Debt Management Service Business

12/31

Department of Banking and Consumer Finance

Pawnshop Business

NE

Collection Agency Licensing Board

Collection Agency

12/31

NY

Athletic Commission

Boxing, MMA, and Wrestling Promoter

10/1

Superintendent of Insurance

Independent or Public Adjuster

12/31

Buffalo – City

Heating Contractor

Hempstead – Township

Sewers and Drains

Hempstead – Village

Sewers, Drains or Water Distribution Systems

New York – City

Building Operations Permit

New York – City

Street Obstruction

North Hempstead – Township

Occupational License or Permit

Ramapo – Township

Sewer System License

OH

Butler – Village

Occupational License or Permit

9/30

Canton – City

Sidewalk Laying, Relaying and Repairing

10/31

Department of Health

Sewage Treatment System Contractors

12/31

Department of Health

Private Water Systems Contractor – Individual

Department of Public Safety Bureau of Motor Vehicles

Commercial Driver Training School

Division of Financial Institutions

Mortgage Broker

Allen – County

Plumbing Installation/Alteration

Ashville – Village

Registration – General Building

Aurora – City

Contractor’s Performance

Avon – City

Contractor License Performance

Avon Lake – City

Contractors

Bedford Heights – City

Contractor

Bexley – City

Contractor

Bowling Green – City

Occupational License or Permit

Brecksville – City

Contractor

Broadview Heights – City

Occupational License or Permit

Brook Park – City

Contractor Registration

Brown – County

Occupational License or Permit

Brunswick – City

Contractor’s Indemnification

Butler – County

Plumbing

Canton – City

Home Improvement Contractor

Chagrin Falls – Village

Contractor Registration

Champaign Health District

Plumbing Contractor

Cincinnati – City

Licensed Sewer Tapper

Clermont – County

Sewer Tapper (Sewer District)

Cleveland – City

Contractor’s License

Columbus – City

Professional Fundraiser

Dayton – City

Occupational License or Permit

Dayton / Montgomery – City / County

Plumbing

East Cleveland – City

Contractors Registration

Euclid – City

Contractors Registration

Findlay – City

Occupational License or Permit

Hamilton – County

Installation/Repair Plumbing Performance

Lima – City

Electrical

Lyndhurst – City

HVAC

Maple Heights – City

Occupational License or Permit

Mentor – City

Certificate of Registration – Electrical

Montgomery – County

HVAC

Moreland Hills – Village

Occupational License or Permit

North Ridgeville – City

Contractor

North Royalton – City

Contractor Performance

Oakwood – City

Cement License

Olmsted – Township

Contractors Registration

Oregon – City

Sidewalk and Driveway Contractor

Parma – City

Contractor

Pepper Pike – City

Occupational License or Permit

Perrysburg – City

Sidewalk Contractor

Pickaway – County

Contractor / Sub-contractor Registration

Portage – County

Contractor

Reminderville – Village

Contractor

Reynoldsburg – City

Contractor’s Registration

Seven Hills – City

General

Shaker Heights – City

Occupational License or Permit

Solon – City

Contractor Registration

South Euclid – City

Contractor Registration

Springfield – City

Home Improvement

Toledo – City

Plumbers Indemnity

Trumbull – County

Electrical Contractor

Trumbull – County

Mechanical Contractor

Twinsburg – City

Contractor Registration

University Heights – City

Contractor’s License

Warren – County

Plumbing

Warrensville Heights – City

Occupational License or Permit

Westlake – City

Occupational License or Permit

Wickliffe – City

Contractor Registration

Willoughby – City

HVAC/Refrigeration

Willoughby Hills – City

Occupational License or Permit

Willowick – City

Contractor Registration

Wood – County (Northwestern Water & Sewer District)

Sewer Tapper

Youngstown – City

Contractors Registration

OK

Used Motor Vehicle and Parts Commission

Motor Vehicle Dealer or Rebuilder

12/31

PA

Real Estate Commission

Real Estate Education Provider

10/31

RI

East Providence – City

Private Detective

11/30

Department of Business Regulation

Alcoholic Beverage

12/1

Contractors’ Registration and Licensing Board

Underground Utility License

12/31

Dealers License and Regulations Office

Motor Vehicle Dealer

Providence – City

Sidewalk

TN

Department of Commerce and Insurance

Dealer of Manufactured Homes

12/31

Department of Financial Institutions

Mortgage Broker, Lender or Servicer

TX

San Antonio – City

Master Electrician

9/30

U.A. Plumbers Local Union 68

Wage and Welfare

Comptroller of Public Accounts

Continuous Bond of Seller (Sales Tax)

12/31

Comptroller of Public Accounts

Fuel Tax

Comptroller of Public Accounts

Mixed Beverage Gross Receipts and Sales Tax

Department of Savings and Mortgage Lending

Residential Mortgage Loan Servicer

Lottery Commission

License to Conduct Bingo

Dallas – City

Paving

Kerrville – City

Contractor License

Kirby – City

Home Improvement Contractor/Salesman

San Antonio – City

Sidewalks, Curbs, Gutters and Driveways

VA

Fairfax – County

Home Improvement Contractor

12/31

WV

Division of Motor Vehicles

Motor Vehicle License Service

12/31

The Bond Exchange Makes Surety Bond Renewals Easy!

Never miss a customer’s surety bond renewal deadline. We quote surety bond renewals 90 days prior to expiration and make them available for purchase online. You can also utilize our direct bill renewal process and let us bill your customer automatically with professional invoices that display your agency name and logo. We’ll provide you with all required renewal forms so your customer stays compliant with the obligee.

The Bond Exchange has 40 years of experience providing insurance agents with the service and expertise necessary to satisfy the surety bond requirements of their customers. Leverage our experience—and free online platform—to streamline the surety bond process. Questions? Call us at (800) 438-1162!

Make Surety Bond Renewal Painless for Your Customer with These 3 Helpful Tips

As a general rule, surety bond renewal is simpler than the initial application. But there are still some things to know that can help ensure the renewal process is smooth and painless for your customer.

Begin the Renewal Process Early

Time flies. And so too can the term for a surety bond, which is typically one year. It’s critical that you stay vigilant and get out ahead of—way ahead of—those fast-arriving renewal dates because a lapse in bond coverage can have big repercussions.

For example, license and permit bonds are closely tied to the issuance of the licenses and permits themselves. If a license or permit bond is allowed to expire, the termination of the principal’s license or permit will follow shortly thereafter. In the period it takes to get everything back on track, your customer could lose out on business.

We recommend beginning the bond renewal process well in advance of expiration: 60-90 days if you can swing it. This is to ensure that not only do you give yourself and your customer enough time to work through the renewal process, but also the provider and obligee. It’s not uncommon for these parties to be backlogged due to renewal congestion or shortened holiday hours.

Help Your Customer Save Money at Renewal

Underwriters take into account a number of risk factors when determining premium rates for surety bonds. Among these factors is the risk that your customer presents in terms of their ability to reimburse the surety if a claim is made. In fact, it’s often the factor that has the most sway.

So if your customer’s premium rate was high last year, it’s important to remind them that improvements in credit scores or overall financial stability will likely reduce their bond renewal rate. Not all bond types require an underwriter’s review of your customer’s finances, but for those that do, the ability to demonstrate improvements can result in significant savings.

Know What Documentation Is Required

Some surety bonds are continuous and require no new documentation upon renewal; others require a continuation certificate. Still others, especially those with fixed term end dates, require that an entirely new bond be issued.

Make it your business to know exactly what bond renewal documentation is required so that your customer can attend to it in a timely fashion—and avoid any last-minute scrambles.

The Bond Exchange Makes Renewals Easy!

Never miss a customer’s bond renewal deadline. We quote renewals 90 days prior to expiration and make them available for purchase online. You can also utilize our direct bill renewal process and let us bill your customer automatically with professional invoices that display your agency name and logo. We’ll provide you with all required renewal forms so your customer stays compliant with the obligee.

The Bond Exchange has 40 years of experience providing insurance agents with the service and expertise necessary to satisfy the surety bond requirements of their customers. Leverage our experience—and free online platform—to streamline the surety bond process. Questions? Call us at (800) 438-1162!

How Much Will a Surety Bond Cost my Customer?

How much will a surety bond cost my customer? The cost (usually in the form of a one-time premium payment) for most surety bonds generally falls between 0.5% and 15% of the bond amount. If you do the math, that’s a pretty big spread. For example, a $20,000 bond could conceivably come in at a cost of anywhere between $100 and $3000.

Why such a large rate variation? Underwriters take into account a number of factors when determining premiums for surety bonds—all based on the risk (probability and severity of losses) to the insurance company. These factors include:

  • Profession/Industry Risk – Your customer’s profession is an important factor in determining the bond rate. A business that performs high-risk services (e.g. mining or construction) typically pays a larger percentage of the bond amount as a premium than one that perform low-risk services (e.g. insurance adjustment or notary public).
  • Bond Type Risk – Often closely correlated with profession/industry risk, underwriters will analyze the loss history of specific bonds or categories of bonds; those that have poor track records of losses (i.e. higher frequencies of claims) require higher premiums.
  • Bond Coverage Risk – The language in the bond form and underlying statutes outlines the responsibilities of the principal (i.e. your customer). The more stringent the requirements the principal is obligated to meet, the higher the surety bond cost.
  • Principal Risk – Last but not least, sureties assess the risks associated with the principal purchasing the bond (i.e. your customer). Because the principal is expected to reimburse the surety company for all losses, their credit history and financial stability are key in determining the final rate offered. Reputation and past performance, which speak to the likelihood of the principal to incur a claim, are also important indicators of overall principal risk.

Receive Instant Quotes on 1000s of Bonds!

The Bond Exchange’s free online platform will instantly deliver the most competitive pricing for your customer’s bonds. Our proprietary algorithm provides the most competitive pricing from over 15 surety markets. With the click of a button, you can send your customer an agency-branded quote, complete with installment options and/or broker fees. Questions? Call us at (800) 438-1162!

What Are Surety Bonds and How Do I Explain Them to My Customers?

As an insurance agent, you spend the majority of your time matching insurance policies to customers. And it’s likely that your customers are already familiar with the framework upon which most insurance policies are built (i.e. an insured and insurer enter into a contract where one or more payments are made in exchange for financial protection or reimbursement against losses). So when the need for a surety bond arises, it’s probably tempting for your customers (and some insurance agents too) to apply this same framework. After all, surety bonds are a form of insurance issued by insurance companies that insure against unmet obligations. But there are some big differences between insurance policies and surety bonds. Notably, it’s your customer who is on the hook—not only to pay for the bond, but to back it as well!

Surety Bonds Defined

BusinessDictionary.com defines a surety bond as a “Formal, legally enforceable contract between a first party (the principal or obligor), a second party (the customer or obligee), and a third party (the surety, such as a bank, bonding company, or insurance company) whereby the surety guarantees payment of a specified maximum sum, or to otherwise compensate (indemnify), the obligee against damage or loss caused by the actions (or a failure to perform) of the obligor.”

Clear as mud, right? Let’s break down this definition by taking a closer look at the role played by each of the three parties involved in a surety bond:

  • This is the party that is obtaining the bond (i.e. your customer). For example, contractors are often required to obtain performance bonds in order to guarantee satisfactory completion of a project. The principal not only purchases the bond, but is also responsible for any claims made against the bond in the case of failure to meet obligations.
  • Obligee. This is the party that is requiring the bond, often a government entity. If the principal does not meet its obligations, it is the obligee that is the beneficiary of any claims filed.
  • This is the party that guarantees the principal can fulfill the obligations set forth in the bond. Although it’s the principal who is legally responsible for reimbursing the surety for any claims made against the bond, the surety is ultimately responsible for paying the obligee for valid claims. For this reason, it’s in the surety’s best interest to carefully assess not only the likelihood of the principal to incur claims (e.g. does the principal have a good performance track record?), but also the ability of the principal to cover claims (e.g. are they financially sound?).

“Aha!”

Your customers may be wondering what the point of a bond is if they are ultimately responsible for all claims payments. In other words, what’s in it for them? To help you answer this question, here are a couple of additional angles from which you can attack the topic of surety bonds and hopefully spark that “aha!” moment of understanding:

  • Bonds aren’t designed to protect the principal. Unlike a standard insurance policy which is a win-win for both the insured and insurer, bonds have no real upside for the principal (i.e. your customer). They exist as a mechanism to protect the obligee from risk. If your customer wants to do business within a certain industry—or with certain government entities—then the question of “what’s in it for me?” is largely a moot one as your customer really has no choice but to obtain the bond being requested of them.
  • Think of the surety bond as a form of credit. If surety bonds didn’t exist, how would your customer guarantee that they could fulfill their bond obligation? They’d need to post 100% collateral in the form of cash. Depending on the bond amount required, this could significantly decrease working capital and liquidity. A surety (or bonding company) provides, in essence, a line of credit to your customer. For a small percentage of the bond amount, the obligee’s need to transfer risk is met, and so is your customer’s need to hold onto liquid cash.

Need Help Obtaining Surety Bonds for Your Customers?

The Bond Exchange has 40 years of experience providing insurance agents with the service and expertise necessary to satisfy the surety bond requirements of their customers. Leverage our experience—and free online platform—to streamline the surety bond process.  Questions? Call us at (800) 438-1162!

How to Explain the 4 Key Differences Between a Surety Bond and an Insurance Policy to Your Customers

Surety bonds are misunderstood. Most people assume they work like insurance policies because they involve payments when things don’t go as planned. But surety bonds and insurance policies are actually very different animals.

When you find yourself explaining surety bonds to your customers, is it hard for them to grasp that surety bonds are different than insurance? We’ve been told by many of you that it is, and so we’ve compiled four key differences between the two that will help you clarify for your customers what a surety bond is—and isn’t.

Key Difference #1: The Number of Parties Involved

Insurance policies involve two parties: the insurer and the insured.

Surety bonds involve three parties:

  • Principal. The party purchasing the bond (i.e. your customer).
  • Obligee. The party requiring the bond, typically a government agency.
  • The insurance company guaranteeing the principal can fulfill the obligations set forth in the bond.

Key Difference #2: The Protected Party

The majority of surety bonds exist to deter individuals and companies from illegal or dodgy business practices. They protect the obligee (the party requiring the bond)—and sometimes the consumer—if such odious events should occur. For example, as you’re probably well aware, some states require that licensed insurance agents obtain an insurance broker bond that guarantees you will never coerce or mislead your clients into purchasing unnecessary or inappropriate insurance products. If you were to then engage in these practices, a claim could be made against the bond.

Insurance policies exist to protect the insured from loss due to unexpected events such as accidents, medical emergencies, or natural disasters.

Key Difference #3: The Party Responsible for Claims

When a principal fails to meet the obligations of a surety bond, the surety initially pays the claim. However, and this is crucial to understand, the surety requires the principal to repay the claim in its entirety. In other words, the principal not only purchases the bond, but is also legally responsible for reimbursing the surety for any claims paid out on the bond.

When a claim is made against an insurance policy, the insurer pays the claim. The insured is not expected to reimburse the insurance company.

Key Difference #4: Expectation of Claims

Because surety bonds are primarily designed to guarantee against inappropriate conduct, they are only issued to principals who have been thoroughly vetted. Therefore, the entire surety bond transaction is approached from the angle that a claim is unlikely.

Insurance policy providers expect claims. Premiums pooled from large numbers of policy holders are structured to absorb this loss and minimize risk.

Need Help Obtaining Surety Bonds for Your Customers?

The Bond Exchange has 40 years of experience providing insurance agents with the service and expertise necessary to satisfy the surety bond requirements of their customers. Leverage our experience—and free online platform—to streamline the surety bond process.  Questions? Call us at (800) 438-1162!

3 Vital Questions to Ask When Your Customer Needs a Surety Bond

If you’re like most P&C insurance agents, you rightfully focus on insurance lines where you can add value and that provide your customers with proper coverage. Occasionally, these core customers may need a niche insurance product that falls outside your expertise.

For most agents, surety bond requests are few and far between. So how do you sound like a pro when discussing a product that is likely not in your wheelhouse? Ask the experts! We’ve put together a quick cheat sheet to walk you through the first three questions every insurance agent should ask when a customer requests assistance in procuring a bond.

Question #1 to ask your customer: “Who is requiring you to purchase a surety bond?”

Also called the Obligee, this is the entity that requires your customer to be bonded. This is most often a government agency (federal/state/city/county).

Hint: If your customer says they are looking for a bond that will allow them to advertise that their employees are bonded, they might be looking for a Dishonesty Bond (also known as a Business Services Bond). These bonds are most common for janitorial service companies, home health services, and handyman/renovation contractors.

Question #2 to ask your customer: “What is the bond amount?”

The bond amount will be determined by the Obligee. Most bond amounts up to $50,000 can be underwritten based on your customer’s personal credit—and many without a credit check. If the bond amount is larger, you will likely need to request a business financial statement.

Question #3 to ask your customer: “What is the purpose of the surety bond?”

It’s important to understand why your customer needs the bond. The type of bond, along with bond amount, determines what form of underwriting will be required for a quote.

Most bonds are required for one of the following purposes:

  • Business License or Permit Bond – Required for your customer to obtain or renew their business license with a government agency.
  • Construction Contract/Performance Bond – Most often required for contractors when bidding on a government project.
  • Employee Theft/Dishonesty Bond/Business Services Bond – Most commonly needed for businesses that perform work on their customers’ premises (e.g. janitorial services, handyman contracting or home health services). These bonds protect your customers’ clients against employee theft.
  • Financial Guarantee Bond – Guarantees that your customer will make payments on a financial obligation. Two of the most common Financial Guarantee Bonds are (1) those required by utility companies to guarantee on-time payment of utility bills from consumers that are expected to use large amounts of energy and (2) those required by unions to guarantee that contractors will pay unionwages and benefits when hiring union
  • Probate or Court Bond – Required by a court for probate matters or for other actions in civil courts.

What next?

We’ve armed you with the basics, but surety bonds can be complicated. It’s often more efficient and profitable to allow a wholesale broker such as The Bond Exchange to take your customer’s bond request to the finish line. We have knowledgeable representatives standing by, as well as a free online platform that streamlines what is otherwise a cumbersome, time-consuming, and, all too often, non-profitable endeavor.

What is an Obligee?

The term ‘obligee’ is one that pretty much always trips people up the first time they hear it.

In terms of surety, the obligee is generally a state government agency.

Basically, it works like this:

Your client (known as the ‘principal’) is obligated to perform their duties (live up to their side of the bargain) through a contract (known as a ‘surety bond’), with a specific agency within your state government (the ‘obligee’) acting as the enforcer of the contract.

obligee

In practical terms, it means that if your client screws up, the person who hired your client will let you know that they failed in their duties, and that you have to cover their failures financially up to the limit of the surety contract.

From there, you have the fun task of letting the government agency know that you had to financially cover for your client’s mistake (the principal), and that they are now obligated to pay you back, with the government backing you up.

The obligee is the 800 lb. gorilla on your side.