Electronic Surety Bonds

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On September 12, the electronic execution and filing of surety bonds took effect as the National Multistate Licensing System and Registry (NMLS) formally adopting the electronic surety bond (ESB).

Electronic bonding replicates the bond execution process – the signing of the bond form by the principal and surety and physically delivering the form to the Obligee electronically through the Internet or another electronic medium, or within a Web-based environment.

Electronic Surety Bonds

Across the U.S., many state laws, regulations, and statutes require professionals in the financial services industry to obtain a surety bond before being issued a license. The surety bond is intended to provide a guarantee to state regulators and consumers in case a financial professional fails to follow the law.  The surety bond can also be used to pay restitution to clients should a financial service professional fail to comply with statutory requirements or licensing agreement by filing against the bond.

The introduction of the ESB or electronic surety bond by the NMLS is aimed at facilitating the process of posting surety bonds faster and more convenient to all parties concerned, namely government agencies or regulators acting as Obligees, contractors or Principals, and Surety firms. The new system allows the electronic filing of surety bonds that greatly reduces the cost of the bond, speeds up the process, and increases the efficiency of its delivery.

The legality of Electronic Surety Bonding

There are two laws that make electronic agreements legal. The Uniform Electronic Transactions Act (UETA) serves as the model state legislation for electronic surety bonding, by making legal the submission of electronic documents and electronic signature. UETA was developed by the National Conference of Commissioners and Uniform State Laws.

Furthermore, the Electronic Signatures in Global and National Commercial Act (E-Sign) states that federal regulators must accept electronic documents and electronic signatures as legally binding if the contracting parties agree to the electronic process. With the EUTA and the E-Sign combined, agreements and contracts entered electronically can now be legally enforceable, including surety bonds.

With no legal hurdles to derail electronic agreements, government agencies that require surety bonds, as well as surety firms producing bonds, must draft their respective methodologies to effect electronic surety bonding. Their electronic process must address important features, including transmission methods, security procedures, verification techniques, and data integration. The Surety & Fidelity Association of America (SFAA) and the National Association of Surety Bond Producers (NASBP), which have thrown their support to the ESB, is asking government agencies and business owners to simplify their methods to encourage a positive response from surety firms, surety bond producers, contractors, and risk managers to adopt the new system.

Why Choose Electronic Surety Bonds

Government data showed that as of 2014, there are at least 177 licensing agencies that require bonding to some professionals across the United States before granting them the license to operate legally.  The NMLS is the primary government agency tasked to manage and monitor many of these professions.

The introduction of an electronic system of surety bonds to the NMLS does not only hasten the process for license applicants, surety underwriters, and state agencies that require the surety bond but also allows the NMLS to establish a complete database of all information about licensing. The automated system also gives all parties easy access to important information via the Internet.

Suggested Methodology

The SFAA and NASBP believe that the new automated system would only reach its maximum benefit if the majority of surety companies, surety bond producers, contractors, and bond applicants (principal) use a single methodology. They reasoned that if only a few of the affected parties utilize the new system, then the benefit of a reduced cost will not be achieved and the whole process of an automated filing of surety bonds is defeated.

With that in mind, the SFAA and NASBP have suggested the following methods encourage broad cooperation amongst industry players in the electronic filing of surety bonds:

  • The filing process and methodology should ensure the bond is enforceable and all aspects of the bond transaction are valid, including the identity and authority of the surety’s attorney-in-fact.
  • The process should incorporate an open public/private key encryption standard that can be implemented cost-effectively by all parties involved in the procurement process working with any number of authentication providers. The process should not require the exclusive use of a specific technology or require access to a single private authentication provider.

Which States Have Moved to Electronic Surety Bonds

As of this writing, there are nine states which have adopted the new electronic surety bond system, Texas, Washington, Idaho, Wyoming, Iowa, Wisconsin, Vermont, Massachusetts, and Indiana. However, the NMLS hopes that all the remaining states would follow soon as the objective is for the nationwide use of ESB.

Filing Surety Bond Under the Automated System

Here is a sample process in using ESB:

  • Producer completes the electronic bond form, and power of attorney if necessary, and affixes digital signature.
  • Producer transmits bond and electronic power of attorney to principal/contractor via e-mail or other electronic means. (The power of attorney could be sent to the producer by the surety company upon authorization of the bond.)
  • Principal/Contractor affixes its digital signature.
  • Principal/Contractor sends bond and power of attorney to obligee at the designated electronic address.

Final Note

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