Why Do I Need A Surety Bond For My License?

There are thousands of different surety bonds in the United States alone. One of the most common types are license bonds. Simply put, these bonds are required by the government in order to obtain a license to legally operate a business.

Often, people ask, “Why Do I Need A Surety Bond For My License?”. To fully understand why the bond is required, you must first know how a surety bond works. First you must understand the parties involved in the bond. There is the ‘obligee’, or who is requiring the bond (ie licensing department of the state). The ‘principal’, or the business/individual required to obtain the bond. Finally, there is the ‘surety’, or the bonding company financially backing the bond. To review, the obligee requires a bond of the principal, who obtains it from the surety (usually the principal must deal with an appointed agency rather than directly with the surety).

Now that you know the parties involved with a surety bond, you will want to know what it does/covers exactly. In the event of a claim, the surety will make sure it is valid. If the claim is valid, the surety pays the obligee the amount of the claim up the the amount of the bond. The obligee (typically the state for license bonds), will then distribute the funds to the principal’s client(s) that were effected. Therefore, it is the principal’s clients who are truly the benficiary in the event of a claim, not the principal as with typical insurance.

Understanding the parties involved in a bond and how it works in the event of a claim is not the full picture. You should also know what you are actually paying for with a bond. Bonds are not insurance, they should be thought of as credit. The surety will turn to the principal for repayment of a claim and any legal fees.

It is currently an industry standard to have principals and their spouses personally indemnify for the bond. This worries many, as this gives the right to the surety to go after the principal’s personal assets to recoop losses from a claim. However, bonding companies will not go after the owners personally right away. After a claim is paid out the surety will send the principal (the company that purchased the bond) a bill for the amount paid out to the obigee and legal fees incurred. If the business fails to pay, the bonding company has the right to go after the owner’s personal assets.

Why would anyone want a bond if they have to pay the surety for a claim? It is quite simple, the alternative is a letter of credit posted directly to the state. In other words, you would have the full amount of assets frozen and you would be paying the bank for the guarantee. For strong accounts, a surety bond is the same rate or even less than a letter of credit. Therefore, it makes no sense to tie up capital and pay the bank a fee that often costs about the same as the bond.

To summarize, a bond is not insurance, but should be thought of as surety credit. A claim will pay out to the obligee (the state), who will distribute the funds to the principal’s client(s) that were effected by the principal’s negligence. If a claim is paid, the surety will look to the principal for repayment, per the terms of an agreement signed prior to release of the bond. The alternative is a letter of credit, which usually costs roughly the same price, but will tie up capital that could be better used. Surety Bonds have been around for quite some time now, and will be here for quite some time to come.

You can apply for a license bond online.

If you have any surety related questions visit the Surety Bond Forums.

buySAFE Expands The Surety Bond Market

The surety bond market is currently conservative and hesitant to write anything out of the ordinary. It is rare to hear about bonding companies taking risks on new ideas, especially ideas that involve new technologies. Suretyship, in general is behind the times. I was pleased and surprised when I heard about buySAFE, a program to bond goods purchased online for up to $25,000. Liberty Mutual is the primary surety backing the program, a surety known for being conservative (like all stable carriers). Hopefully, the buySAFE program will encourage other companies to embrace technology and other new ideas to expand the surety bond market.

The soft bond market at the turn of the millennium had many sureties writing bonds that well exceeded what principals qualified for. As a result the sureties had huge losses and the entire industry took a 180 degree turn for more traditional underwriting.

With the end of the soft market, it has become hard to sell programs to sureties that are not typical bond guarantees. The buySAFE program is precisely what our industry needs, provided it is successful. Bonding companies need to realize, jusy because an idea is new does not necessarily mean it involves more risk. If the buySAFE program is successful, sureties will be more open to other ways to expand the market. The turn of the soft bond market taught the industry some valuable lessons, lets hope the industry will not be ignorant to creative ways to grow the surety industry.

The surety industry is spending a good amount of money trying to encourage the private sector to make use of surety guarantees more often, rather than just when required for public work. Businesses are always trying to keep their costs down as much as possible, thus convincing the private sector they need surety backing is an uphill battle. It is hard to convince someone they need bond coverage unless they have been directly effected or personally know someone that has been effected. That is why most bond requests/requirements from the private sector seem to come from larger companies. Due to their size and probability they will more often be effected by lack of a bond. Larger companies also have more capital to spare to pay for the guarantee.

The buySAFE program is a big step in the right direction, progress with the changes around us. Finding creative new ways to expand the market is what is needed. The surety bond industry needs to start embracing technology. The bonding companies that do not will have higher operating expenses and lose out in the end. Let’s hope Liberty’s new venture is a successful one so the market can continue it’s expansion.

Join us to discuss this further in the Surety Bond Forums: Surety News.

Georgia Proposing To Increase Dealer Surety Bond

The state shut down a bill in 2004 to increase the dealer surety bond amount from $20,000 to $50,000. The argument for the increase is to better protect consumers purchasing vehicles from fraud. The argument against the increase is from the dealers trying to do what they can to keep their costs down, citing some smaller shops may go belly up. Both sides of the argument bring up valid points, both sides also stretch the truth to make their points. The article that brought this to my attention, Why Georgia can be a bad place to buy a car told both sides of the story, but had some incorrect information as well.

The article told a story of a couple purchasing a vehilce, having it taken away and being stuck with the bill. This type of fraud is exactly what surety bonds are required for. However, if the bond liability is only $20,000 and the car you are purchasing is more then you are out of luck. If the car you purchased was only $10,000, but someone already was paid the full $20,000 in a previous claim, you are are also out of luck. I think the reasoning for a larger bond requirement is quite obvious. An increased bond would also make Georgia car buyers more comfortable buying their vehicle in the state. The current GA car dealer market is getting a bad reputation, just take a look at the title of the article I am writing about!

The article also stated that State Representative Alan Powell, opposed the increase to the current Georgia dealer bond requirement. Powell is owner of Highway 77 Auto Sales and feels the increase could put many mom and pop shops out of business. The article asserted that the increase would only cost dealers a couple hundred dollars extra every 2 years, or about .5% of the bond amount per year. This statement could not be farther from the truth. The current surety bond market is extremely conservative. Average rates for dealers with good credit are roughly 2-3% per year. Rates for dealers with credit problems are closer to 15% per year. In other words the cost to the dealers would be 4 to 30 times the amount the articles states.

The current bond market is particularly hard on auto dealers, as they have more credit issues than other business owners. This has nothing to do with dealers being irresponsible people, but rather the fact they must often use their personal lines of credit to purchase vehicles. If business is slow they have late payments and their credit scores plummit.

Whether you decide to increase the bond or leave as is, people will be effected. In the end, I too will have to agree that the increase is a must for the good of the citizens of Georgia, as well as the dealers. The cost of vehicles are up from when the bond requirement was originally made. The bond amount is no longer fullfilling the needs of why the state required it in the first place.

You can discuss this specific article more at: Surety Bond Forums: News

You can discuss dealer bonds in general at: Surety Bond Forums: MVD Bonds

You can apply for an Auto Dealer Bond online at Auto Dealer Bond Application

Mortgage Broker Bonds: Will Other States Follow Colorado's Lead?

The Colorado Association of Mortgage Brokers’ has proposed a requirement of a $100,000 surety bond to be filed with mortgage brokers’ licenses. The state is one of few that do not currently require a bond. Most are welcoming the idea with open arms, as it should help protect the state and it’s citizens against mortgage fraud.

There are not many states left that do not require a bond. Off hand I can only think of Nevada, Montana and Massachussetts. Pennsylvania does not require the bond unless the broker wants to collect payment up front ($100,000 bond is then required). What is the reasoning that these states do not require a bond? Your guess is as good as mine. You would think the legislatures would want to protect their citizens against fraud, especially when it is the largest investment most will make. Perhaps Colorado’s new proposal will make the remaining unprotected states open their eyes.

Colorado also did the right thing by requiring large enough of a bond. Many states only require a $10,000 bond, Oklahoma only requires $5,000. If a broker is fradulent, they more than likely fraudulent with many, not just in just one instance. With the recent real estate boom, one claim could wipe out the full bond amount, leaving many victims of fraud unprotected.

It is time for states that do not require bond to wake up, it is time to protect your citizens against fraud! States that require minimal bond amounts need to think about real world situations and realize their bond requirements will not protect many.

You can see our current list of mortgage broker bond requirements.

You can also obtain a quote online for a mortgage broker bond.

Learning The Importance Of Bonding, The Hard Way

Sometimes people won’t listen to solid advice unless it directly effects them. Unfortunately, some people simply need to learn the hard way before they make more sound decisions. This can be seen almost every time suretyship makes its way to the news. Since surety bonds are not the most exciting thing in the world, you typically only hear about them when there is a problem, especially when it comes to contract bonds.

The Westchester, New York School District is a prime example of city officials learning the importance of requiring bonds. In the article “Westchester Schools’ Dumping Deals Costly To Taxpayers”, the contractor hired to do the work never submitted a surety bond guaranteeing the work. The district allowed the contractor to begin work prior to submitting the bond. The end result was the contractor running out of funds and defaulting on the project. Had the job been secured by a bond, the surety could have hired another local company to complete the work.

Why would an obligee not require a bond? There are numerous reasons why, sometimes the government simply lets it slide by due to red tape. Often, private obligees and sometimes public, simply do not want the cost of the bond to be included with the bid and therefore do not require it. Sure this keeps costs down, if everything goes right that is. By that logic, there is no reason to have any type of insurance product at all. However, we all know gambling is not a wise decision if you plan on being fiscally responsible.

Tax payer should be pleased to hear that most articles found in the news regarding suretyship are situations where a bond was obtained. Jackson County, Indiana required a bid bond for the demolition of a building to make way for a new police station. The lowest bidder was unable to do the work at the amount submitted. The city attorney stated: “I am not sure how they think they could do this job with that low of an amount,” and “They might as well have written their bid proposal on a napkin and submitted it.””. The Fidelity and Deposit Co. of Maryland, Colonial American Casualty and Surety Co., and Zurich American Insurance Co. had to assume control of a project for an addition to a Dallas courthouse after the contractor walked off the job.

Surety associations are making a great effort to show the private sector the importance and benefits of surety bonds. I do not know of any statistics regarding increases in surety requirements requested from the private sector. However, personally I have seen little difference. Hopefully businesses nationwide will open their eyes to the benefits of suretyship.