When trying to understand what a surety bond is, a simple search will give you its definition, the different types of surety bonds, and the parties involved – Principal, Obligee, and Surety.
There are some things about surety bonds that are just as important but are rarely talked about.
So today, we’re going to focus on those. Here are 10 FAQs about Surety Bonds that you may not know:
IT’S NOT THAT HARD TO GET A SURETY BOND
It really is not.
Every surety bond company has a specific set of guidelines in order to determine whether a person is qualified or not. We’re not going to lie, some have stricter rules than others.
However, there are sureties that have the ability to source the best insurance carriers, best rates, and a higher chance of getting that sweet approval for their clients.
We here at Surety Bond Authority have created a streamlined bonding process that will make it easier and faster to get bonded. Even high-risk applicants will have a chance to qualify.
SURETY BONDS ARE NOT EXPENSIVE
A common misconception is that the principal (the person who will obtain the bond and fulfill the requirements of the bond) will pay the full bond amount.
You don’t have to pay the full bond amount. You don’t even have to pay half of that.
You only need to pay a small percentage of the bond amount, or what is known as “bond premium”.
Let’s say, for example, you’re getting a Money Transmitter Bond. The bond amount – depending on the state – can go as high as $500,000.
You don’t need to pay the surety $500,000 to get that particular bond.
If your credit score is excellent, your bond premium will only be 1% of the bond amount which is $5,000.
SURETY BOND PREMIUMS ARE NOT RECURRING MONTHLY PAYMENTS
Another common misconception is that the bond premium will be paid every month just like what you would normally do for insurance. That doesn’t apply to surety bonds.
Bond premiums are usually one-off payments. You will only need to pay the bond premium during the initial acquisition of a surety bond and every time it is renewed.
Bond renewal varies per bond. There are bonds that are renewed every year, every two years, and so on. There are also bonds that remain continuous.
SURETY BONDS ARE LEGAL CONTRACTS
It’s only natural to think that court bonds are the only type of surety bonds that are legally binding. They are, after all, required to be filed in civil lawsuits.
But they’re not the only bonds that may result in legal consequences when a default is committed by the principal.
All types of surety bonds are legal contracts or legally enforceable promises. Yes, even the simplest and most common ones.
License and permit bonds, for example, are not just requirements that must be ticked off the list in order to get a license.
The obligations stated in that particular class of bond are rooted in the underlying forces of the law, so to speak.
So, if the Principal fails to perform the obligations of the bond, he or she will not be given a mere slap on the wrist. The said person will be legally responsible for the claims made.
Even though most of these types of bonds have nominal penalties, the principal will still be held liable based on the applicable statute.
YOU MAY QUALIFY EVEN IF YOU HAVE A BAD CREDIT SCORE
There are those who give themselves the final verdict of being turned down by a surety even before they apply because of bad credit.
We’re not going to lie; the credit score is very important in getting qualified for a bond. But – yes, there is a “but” – it is not the only deal-breaker.
While this may be true years ago, times have definitely changed. You may still get a bond even if your credit rating is not that good.
Not all surety bond providers will take on this type of responsibility. But there are those who do, and we’re one of them.
Since the risk is higher than those who have excellent credit scores, applicants with low credit ratings may need to pay a higher bond premium.
YOU CAN MODIFY OR UPDATE INFORMATION ON AN EXISTING BOND
That’s right. You don’t need to get a new bond if you need to update or change any information on a bond that’s still in effect. You only need to ask your surety bond provider for a bond rider.
A bond rider is the only way to update or modify an existing bond. You’ll be able to modify the following through a bond rider:
- Principal’s name
- Bond amount
- Principal’s address
- Bond number
- Effective date of the bond
- Specific language in the bond form
THE PRINCIPAL AND SURETY’S LIABILITIES MAY GO BEYOND A BOND’S EXPIRATION DATE
For most bonds, the liability of the principal and the surety will end once the bond has expired or once it has been canceled.
However, there are bonds that will allow the obligee to file a claim even after the bond’s expiration date.
This is known as the “tail” or statutory limitation for filing claims. The exact date upon which a claim can be filed varies.
For example, in Nebraska, a Mortgage Banker Bond allows claims to be filed three years after the bond has expired.
The California Motor Vehicle Dealer Bond allows claims to be filed three years after the bond has been canceled.
SOME SURETY BONDS ARE ONLY FOR PERSONS WHO DON’T MEET CERTAIN QUALIFICATIONS
There are bonds that are required of certain individuals that do not meet certain qualifications. This is referred to as the “adverse selection clause”.
For example, when a registered garment manufacturing company has committed past labor violations, the California Labor Commissioner will request the said company to submit a surety bond.
Sometimes, a bond is required due to a lack of sufficient funds. In the State of Minnesota, loan originators who have less than the minimum tangible net worth required will be asked to procure a surety bond.
THE PRINCIPAL WILL PAY FOR THE CLAIMS
There are several reasons why a claim is made – from the principal not doing his obligations to a simple misunderstanding between the principal and his client.
Whatever the reason is, the principal will be responsible for taking care of the claim under the indemnity agreement.
If the principal resolves the claim, then no further action from the surety is needed. If the principal fails to take action, the surety will investigate the claim in order to determine if it’s valid or not.
If it is valid, the surety may resolve the claim by paying on behalf of the principal. However, the principal will have to reimburse the surety for the payments made by the surety and all the other costs (including legal costs) that come with resolving the claim.
AN INDEMNITY AGREEMENT MUST BE SIGNED BEFORE A BOND IS EXECUTED
Speaking of the indemnity agreement, right before the bond is executed, the surety will ask the principal to sign an indemnity agreement.
The said agreement will – as the name suggests – indemnify or compensate the surety for the payment made by the surety on behalf of the principal.
Since an indemnity agreement is subject to doctrines of contract law, there must be a consideration; and the consideration is the consequent issuance of the bond.
Now here is where it gets tricky: an indemnity agreement must be signed before the bond is executed to avoid what is called “past considerations”.
It means that an indemnity agreement may be invalidated if there are no solid proofs that the signing of the indemnity agreement was done as a pre-condition to the bond’s issuance.
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