Who Needs a Surety Bond?
February 26, 2021
Surety bonds can be confusing, and insurance agents often times turn to surety experts, such as BondExchange, for assistance in serving their surety customers. Being ahead of the curve is one of an insurance agent’s most prominent skills, especially as it relates to marketing and retaining new and existing clientele. Insurance agents need to know the ins and outs of their customer’s business and, along with other insurance coverages, many industries have bonding requirements, which serve as a prerequisite to operation. In this week’s blog post, we break down surety bond requirements by industry, helping insurance agents stay ahead of the curve and assess their client’s needs.
For assistance in obtaining a specific bond for your customer, give us a call at (800) 438-1162.
Your contractor clients will run into surety bond requirements during the life cycle of their business. Contractors can be required to provide bonds to fulfill licensing requirements, pull permits and/or perform larger commercial projects for municipal entities or the federal government. The full list of every city, county and state bond requirements for contractors is extensive, so we have consolidated the most prevalent contractor bond requirements below:
Contractors who submit a bid to work on a project may be required to purchase a surety bond. Bid bonds ensure that contractors will meet all of the requirements of the bid specifications. In the event the contractor does not meet these requirements or fails to sign the contract, the surety bond company must pay the project owner the difference between the winning contractor’s bid and the next lowest bidder, but not more than the bond amount. The amount of the bid bond is usually calculated as a percentage of the contractor’s bid amount, generally 5%, 10% or 20%.
Performance and Payment Bond
To provide a guarantee that the project will be completed, owners can require a performance and payment bond. Performance Bonds provide assurance to the project owner if a contractor fails to complete the work specified in the contract and within the allotted time frame. Payment Bonds work in conjunction with performance bonds and ensure that laborers, suppliers and vendors will be paid by the contractor, preventing liens on the project that can affect the project owner and the success of the project.
Subdivision bonds are most often required for developers who are constructing a new residential subdivision to ensure that they will complete the construction of all sidewalks, storm drains, streets, and other public infrastructure. Though less common, a version of Subdivision Bonds known as Site Improvement Bonds, can also be required for improvements on existing buildings or developments.
Businesses who supply contractors with the materials necessary to complete a project may need to purchase a surety bond. Supply bonds ensure that suppliers will provide all materials as specified in the purchase order.
Also referred to as “warranty bonds”, these bonds ensure that the project owner will receive compensation in the event that poor workmanship leads to issues with a completed construction project.
Contractor License Bond
Many states require contractors to be licensed and bonded prior to conducting business operations. If your customer needs a surety bond to obtain a business license, then they need a constructor license bond.
Click here to check out our state by state contractors license bond page
Contractor Tax Bonds
Are generally required for contractors working on projects outside of the jurisdiction they are licensed in. The bond ensures the contractor will pay all required taxes and fees to the local municipality where work is performed.
Most states have surety bond requirements for businesses providing investing, lending, or money/asset management services. Surety bonds for customers that work in financial services generally protect the public from financial harm resulting from unethical actions committed by your customer, as well as ensure your customer pays all required taxes and fees. Below are the most common types of financial services bonds:
Collection Agency Bond
Collection agencies seeking to obtain a business license must purchase this bond. Collection agency bonds ensure that the agency will pay the collected funds to the proper party.
Credit Service Organization Bond
Many states require credit service organizations to purchase a bond prior to receiving a business license. Credit service organization bonds ensure the organization complies with their state’s licensing requirements.
Money Transmitter Bond
Required for individuals and business entities who collect funds and transmit them to a third party for a fee. Money transmitter bonds aim to ensure full payment of funds to users of the transmitter’s service.
Mortgage Lender/Broker License Bond
Many states require mortgage lenders and brokers to purchase a surety bond prior to obtaining a business license. Mortgage lender/broker license bonds protect the public from financial harm resulting from unethical actions committed by the lender or broker.
Payday Loan Bond
Required for businesses who offer short term loans to the general public and acts as a prerequisite for obtaining a business license. Payday loan bonds protect consumers in the event the lender acts unethically.
Businesses who transport cargo over state lines or operate as an ocean transportation intermediary (OTI) may need to obtain a surety bond prior to engaging in business activities. Below are the most common types of bonds prevalent to the transportation industry:
BMC-84 Freight Broker Bond
Freight brokers and forwarders must purchase this bond prior to receiving their freight broker or forwarder registration. Freight broker bonds are regulated by the Federal Motor Carrier Safety Administration (FMCSA) and ensure motor carriers and shippers are not harmed by unethical actions committed by the broker or forwarding agent.
FMC-48 Federal Maritime Commission Bond
Required for Ocean Freight Forwarders (OFF) and Non-Vessel Operating Common Carriers (NVOCC) as a prerequisite to obtaining a business license. OFF and NVOCC bonds are regulated by the Federal Maritime Commission.
The motor vehicle industry is heavily regulated, and each state has its own specific bond and licensing requirements for businesses in the auto industry. If your customer operates in the motor vehicle industry, they will likely come across the following bond requirements:
Auto Dealer Bond
Required for auto dealers and serve as a prerequisite to obtaining an auto dealer license. Auto dealer bonds are regulated by state government agencies, usually the DMV, and protect consumers against losses resulting from fraudulent actions committed by the dealer.
Certificate of Title (Lost Title) Bond
Allows owners of a motor vehicle to claim legal ownership of a vehicle when they cannot procure the appropriate title
Vehicle Registration Services
Required for registration services who register consumer vehicles with the appropriate government agency. These bonds serve as a prerequisite to obtaining a business license or permit.
The medical industry has specific bonding requirements for businesses who engage in certain activities. Below are the most common types surety bonds prevalent in the medical industry:
Suppliers of Durable Medical Equipment, Prosthetics, Orthotics and Supplies (DMEPOS) Bond
Businesses who supply durable medical equipment, prosthetics, orthotics, and supplies must purchase and file a minimum $50,000 surety bond with the Center for Medicare and Medicaid Services (CMS). The bond guarantees the appropriate repayment of Medicaid disbursements for the sale of durable medical equipment to (CMS) .
Medical Marijuana Bond
Required for retail dispensaries who sell medical marijuana. Medical marijuana bonds are regulated by state government agencies.
Patient Trust Bond
Many states require assisted living facilities to purchase this bond to ensure their patient’s trusts are properly managed. Patient trust bonds are regulated by state government agencies.
31 states plus the District of Columbia require notaries to purchase a surety bond prior to obtaining their notary commission. Insurance agents can check our Notary Bond Page for a comprehensive guide on notary bonds, including bond cost and requirements by state.
It may surprise you to learn that licensed insurance professionals who utilize any MGAs or wholesalers (like BondExchange), are considered a broker and will likely need a surety bond for their agency. Insurance agencies can run into the following bond requirements:
In many cases, licensed insurance professionals act in both the capacity of an agent and a broker. If you utilize any MGAs or wholesalers (like BondExchange), you are considered a broker and will likely need a surety bond for you or your agency
Title Insurance Producer
Acts as a prerequisite to obtaining a title producer license and ensures that the producer will remit all required funds to the appropriate parties.
Surplus Lines Producer/Broker
Required in some states for insurance brokers who offer surplus lines to consumers. These bonds protect the public from financial harm resulting from unethical acts committed by the broker.
There are different bond requirements insurance agents can run into dependent on the customer’s realm of involvement within the legal industry. Prosecuting/Defense attorneys responsible for petitioning civil cases may run into the following judicial bonds:
Ensures that the plaintiff will pay all costs and fees suffered by the defendant in the event an a court deems the injunction should not have been issued
Required for a plaintiff who wishes to seize property from a defendant before the start of a court trial. Counter replevin bonds are available for defendants seeking to prevent this from occurring.
Required for defendants seeking to appeal a court’s ruling. The bond ensures the plaintiff will receive compensation in the event the defendant loses the appeal and is unable to pay out the judgment. Also referred to as an “Appeal Bond”.
Family or estate attorneys will have their own subset of bond requirements and, if your agency provides insurance solutions for these attorneys you will likely run into the following bond class:
Probate bonds protect the beneficiaries of an estate from financial harm if the fiduciary of the estate (your customer) breaches their fiduciary duties. A fiduciary is a person that puts the interests of someone else, in this case, the beneficiaries of the estate, ahead of their own. Probate bonds are required by a probate court as a prerequisite to an individual assuming the fiduciary role over an estate’s assets. There are four different types of probate bonds:
- Administrator: Required for a fiduciary handling the affairs of an individual who has passed away without a will
- Executor: Required for a fiduciary who has been designated in the will as the executor for an individual who has passed away
- Guardianship: Required for a fiduciary who administers the estate of a ward – a minor OR an individual deemed legally incompetent. The fiduciary may also make health related decisions for the ward
- Conservatorship: Required for a fiduciary who administers the estate of a ward. Unlike guardians, conservators are only responsible for financial decisions rather than the health and well-being of the ward.
Businesses who sell certain items to the general public, and collect sales tax on these items, may need to purchase a surety bond. Below are the most common type of surety bonds required for businesses who engage in retail sales:
Alcohol and Cigarette Tax Bonds
Businesses who sell alcohol and cigarettes may need to obtain a bond to ensure full payment of any associated taxes to the relevant government agency.
Required for businesses who sell lottery tickets or handle lottery equipment. Lottery bonds ensure that businesses will remit all required monies to the appropriate government agency.
Some states require pawnbrokers to purchase a surety bond prior to receiving a business license. Pawnbroker bonds are regulated by state government agencies and protect consumers in the event a pawn broker were to lose a piece of property that has been offered up as collateral.
Sales and Use Tax Bonds
Required for businesses who collect sales tax and ensures that government agencies will not suffer financial harm if the business fails to remit any taxes or fees.
If your customer’s business deals in either agricultural products or livestock, they may need to purchase one of the following bonds:
Agricultural Products Dealer Bond
The Department of Agriculture requires agricultural product dealers to purchase a surety bond that, in part, ensure full payment of all obligations to producers and other vendors
Packers and Stockyard Bond
The Packers and Stockyard Act requires the following entities to obtain a bond:
- Market agencies selling livestock on commission
- Market agencies buying on commission and dealers
The bond ensures that all market agencies and sellers will make all payments to livestock sellers.
Over the course of a business’s life cycle there are multiple commercial insurance product requirements necessary to operate. Some businesses may be required to purchase a form of fidelity bond. Fidelity bonds, commonly referred to as Employee Dishonesty, Business Services or simply Dishonesty bonds, provide protection to the employer from employee theft and to the employer’s customer’s when the business’s employees have access to their personal or business property. For example, if an employee of a janitorial service provider were to make off with a customer’s jewelry box, a bonded janitorial company’s bond would provide compensation for the loss should the employee be convicted of a crime. Additionally, if the business provides a retirement savings plan for its employees, it would be required to purchase and maintain an ERISA Bond. The United State Department of Labor requires the fiduciaries over a business’s retirement plan to purchase an ERISA bond. The bond ensures that plan participants (employees) will receive compensation for financial harm if the fiduciary causes a loss due to fraudulent or dishonest acts.
2 thoughts on “Who Needs a Surety Bond?”
It really stood out to me when you explained that a certificate of title bond will allow an owner of a vehicle to claim legal possession of it if they don’t have the right documents. It seems like it would be important to have the tile of a vehicle when selling it so that you can transfer ownership. If you don’t have the title, I would imagine that you would be able to get one of these bonds so that you can go through with the sale.
Almost everyone needs a surety bond for one thing or another. You have explained it quite well and systematically in this article. Well done!
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