As a property/casualty insurance agent, you’re used to focusing on providing your clients with top-quality service and serving as a great resource for all insurance questions they might have. Then suddenly your client throws you a curveball when what they need is not insurance, but a surety bond. Through your insurance training, you may have a fundamental understanding of surety bonds, but they can still be confusing. Even walking your clients through the bonding process can be complex.
Surety bonds are very different than what you’re used to, but with a quick overview of the basics, you’ll be on your way to learning what a surety bond is and being able to provide solid advice to your clients.
This article will help you get started writing surety bonds direct. You’ll learn the basics of bonds and what you need to obtain an approval. If you are unfamiliar with bond markets, it’s wise to begin by working with a surety bond broker until you know the markets well enough.
Understanding surety bonding starts with knowing exactly how bonds are different from P/C Insurance.
The largest difference between property/casualty insurance and surety bonds lies in what entity ultimately has to pay claims.
P/C Insurance vs. Surety Bonds: Understanding the Differences
The largest difference between P/C insurance and surety bonds lies in what entity ultimately has to pay claims. While initially, insurance carriers for both P/C insurance and surety bonds will pay a claim, with a surety bond the insured is ultimately responsible for paying any valid claims which arise, plus legal costs. In a sense, a surety bond is a line of credit to ensure a valid claim will be paid promptly. What it doesn’t alter is the insured’s responsibility for those claims.
Further, while P/C insurance is designed to protect the insured, a surety bond is designed to protect the insured’s customers. That’s why a surety bond is often required for professional licenses. Always start with a firm understanding of these differences. Once everything makes sense, you’ll need to determine how many bonding requests you’re likely to be handling.
Your Customer Needs a Bond: Where Should You Start?
The first question you’ll need to ask yourself is whether you’re going to handle a low or high volume of bonding requests. This will determine the best option for you going forward.
For Low-Volume Bonding: If you handle a small number of bonding requests, your best option is to work with a bonding specialist. These bond agencies can offer low rates through access to many bond markets. With direct underwriting, you’re missing out on potential savings for your clients, as well as the advantage of working with an experienced agent who understands the intricacies of bonding.
The question then becomes, “Which company should I trust?” The three main factors you’ll want to look for are reputation, convenience, and size. Reputation is straightforward – you want to work with an agency with enough industry knowledge to advise you throughout the bonding process, as well as handling any claims.
You can’t downplay convenience, though: features like an online system that allows you to easily manage your bonds and get instant online approval which can be big time savers. Finally, size is important, because size relates directly to cost. Larger agencies can shop for best rates and savings are then passed on to your clients.
Once you’ve obtained a bond approval for your client, an online platform will allow you to simply print the bond and send it to them. It’s even possible to install a platform right on your own website, allowing your clients to apply, pay and print bonds there.
For Medium to High-Volume Bonding: If you’re seeing increased numbers of bonding requests, it may make sense to begin writing bonds directly. We’ll cover how you can do this in the next sections.
Understanding Bond Types
Before you worry too much about how many bonds you’ll be handling, it’s essential to have a firm grasp of the types you’ll likely deal with. Here are the categories of bonds you’ll need to be familiar with:
Contractor Bonds: Construction contractors are required to obtain what can be a dizzying array of bonds for different types of jobs, as well as for varying stages of a single job.
- Bid Bonds guarantee that the bid is accurate, and if the bid on a job is accepted that the contractor will obtain a performance bond if required.
- Performance Bonds guarantee that the contractor will carry out work on the project following the rules and guidelines established in the contract.
- Payment Bonds guarantee that the contractor will pay all suppliers, laborers, and subcontractors.
- Supply Bonds ensure that suppliers deliver the materials they promise in their contracts.
- Maintenance Bonds provide a sort of warranty on the work done for a set period of time after the work has been completed.
License and Permit Bonds: As mentioned, surety bonds are often required to obtain licenses or permits. These are usually fairly straightforward bonds, designed to protect the public in the event that the bond holder violates the law in some way while performing work under a license or permit. These can be required for anything from a car dealership to a travel agency.
Court Bonds: Court bonds are not bail bonds. Court bonds are required by a court or a specific law and cover other types of responsibilities to a court. Examples include:
- Appeal Bonds are often required for appealing a court’s decision.
- Guardian Bonds allow a person to act as a legal guardian for a minor.
- Probate Bonds allow a person to act as a fiduciary or executor of an estate of a deceased person.
Fidelity Bonds: Fidelity bonds work a bit differently than surety bonds in that they are usually not required by the government. While they often protect your clients from your actions, they can also be used by a P/C agency owner to protect against the actions of your own employees. Here’s a breakdown of the most common types:
- Business Services Bonds protect your customers from the actions of your employees, for example, theft.
- Janitorial and Cleaning Bonds are specifically designed to protect the clients of janitorial or cleaning services.
- Employee Dishonesty Bonds protect you against actions by your own employees including embezzlement, forgery and theft.
- Financial Institution Bonds are a type of employee dishonesty bond designed specifically for financial institutions.
- ERISA Bonds protect members of employee benefit plans from fraud.
What Do You Need to Collect?
Because different types of bonds are required by different entities for different purposes, the process is unique for each type. Here’s an overview of what your client will need to provide:
Contract Bonds: A contractor must receive a bond line approval from the surety prior to being bonded for a specific job. Contracting companies that have been in business for less than one year have an automatic bond limit of $100,000. You can find more information on bond limits here.
As you’ll see below, the contract bond application process is different for small and large contracts.
For small contract bonds: (Jobs below $350,000)
- Application form
- Credit release form
- Personal financial statement for each owner of the business (only required for bond lines of $700,000 or more).
For large contract bonds, you will need the above plus: (Jobs $350,000 and above)
- Large contract bond application
- Copies of the company’s financial statements from the last three years, ideally CPA prepared.
For bid bonds for both small and large contracts:
- A copy of the invitation to bid, the bid specifications, the bid form, and any special bond forms may be required.
- If the bond is needed for a newly contracted project, the award letter and the contract or purchase order will need to be included.
License and Permit Bonds:
- License or permit bond application form
- Personal financial statement
- Court bond application form
- Personal financial statement
- Credit release form
- Blank copy of the bond
- Copy of the court order
Choosing the Right Bond Market
When considering what type of bonds you’d like to handle, you’ll need to carefully consider each bond market. What factors should you consider? Here’s a brief overview of the major elements of choosing a bond market:
- What is the nature of the risk the bond addresses? For this consideration, you’ll want to think about the likely outcomes and the probability of any claims against the bond. For example, a claim against a large and well-established construction contractor is probably less likely to occur than one against a smaller and less established firm.
- What are the bond amounts? The larger the amount, the more the client will pay to acquire the bond.
- How risky is the individual client? This is why a variety of personal and business financial statements are required for most bonds. The better the credit of the individual or business involved, the lower the risk.
- What does the market look like as a whole? This means whether the bond market is more favorable to buyers or sellers at this particular moment, as well as where it seems likely to go in the future. The surety bond industry is currently soft, but that looks likely to change soon.
Once again, if you are unsure which market to send your bond to, you should consider working with a surety bond broker to start.
This will help you get a better understanding of the bond markets without making your clients’ needs go unsatisfied. Once you know the markets well enough, you can write direct on your own.
From This Issue
June 20, 2016
Insurance Journal West Magazine
Umbrellas – Personal & Commercial; Construction; Medical Professional Liability
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About Eric HalseyHalsey is a historian by training and has been interested in U.S. small businesses since working at the House Committee on Small Business in 2006. Coming from a family with a history of working on industry policy, he has a particular interest in surety bonding and insurance; he loves sharing his knowledge of the industry for JW Surety Bonds. Phone: 888-592-6631. Website: www.jwsuretybonds.com
ERISA Bond FAQs
Q: What is an ERISA bond?
A: An ERISA bond is basically another form of insurance for employee benefit plans. The bond is taken against those who control the plan funds (otherwise known as a fiduciary). Though definitions vary, in most instances a fiduciary is a person who exercises some amount of power and control over the plan. In an ERISA qualified pension plan, the investment manager, investment advisors, and trustee are all considered fiduciaries. The ERISA bond ensures that plan participants are protected against losses due to fiduciary fraud, dishonesty, or otherwise criminal behavior. However, unlike standard insurance, the ERISA bond is not necessarily meant to cover full losses. It will only cover up to the pre-calculated payout amount.
Q: There’s already insurance on my pension plan. Does that mean an ERISA bond is unnecessary?
A: No. The existing insurance is most likely what is referred to as ‘errors & omissions’ insurance. E&O insurance specifically protects against fiduciary mistakes, and, depending on the plan, may protect against neglect. E&O insurance doesn’t overlap with ERISA bond coverage. Remember, ERISA bonds protect against fiduciary fraud or dishonest acts. Your pension plan can and should be covered by both E&O insurance and an ERISA bond.
Q: Are ERISA bonds required by law?
A: Technically, yes. ERISA regulations demand that generally all employee benefit plans be covered by an ERISA bond. Interestingly, however, ERISA regulations do not outline any penalties for fiduciaries that choose not to purchase ERISA bonds for their plan.
Q: What happens if there’s no ERISA bond coverage for the plan?
A: If there’s a loss as a result of fraud, dishonesty, theft, or some other criminal act, then the fiduciaries will have to pay out-of-pocket for the losses. In other words, they will become personally liable for the losses. Losses will therefore be accounted for in most cases, unless the fiduciary doesn’t have the personal assets to cover the losses.
Q: Are there specific ERISA bond requirements?
A: ERISA bonds have several requirements as outlined by the statutory provisions of ERISA Section 412:
- The bond must have a minimum payout equal to at least 10% of the plan assets. However, the payout cannot be less than $1,000 or more than $1,000,000.
- The bond cannot have a deductible.
- The bond must be in the name of the retirement plan or a trust, or it must in some way identify the plan so that representatives can make a claim under the bond, if need be.
- The bond amount must be fixed annually, for each fiduciary, depending on the plan asset total.
- The plan must be placed with a Department of Treasury-approved surety or reinsurer, and the plan fiduciaries cannot have any control or interest in the surety or reinsurer.
- The bond must cover ERISA regulation criminal losses.
Q:Is an ERISA bond expensive?
A: No. In fact, the premiums for ERISA bonds tend to be relatively low cost. The price depends on the total plan assets, but most insurance companies charge from between $100 and $300 per year for ERISA bond coverage.
Q: What conduct does an ERISA bond cover?
A: ERISA contains a number of civil and criminal provisions. ERISA bonds specifically cover criminal acts by the fiduciaries. These acts include, but aren’t necessarily limited to:
Q: Is an ERISA bond always necessary, in practical terms?
A: No, an ERISA bond isn’t always necessary, though having one is encouraged. In some cases, there’s an existing corporate fidelity bond arrangement in place, so an ERISA bond may simply be redundant. Corporate fidelity bonds, like ERISA bonds, cover dishonest, fraudulent, and criminal behavior by plan fiduciaries.