Independent insurance agents have a crucial role to play in meeting the risk management and casualty insurance needs of businesses.
It is also important to pay attention to the potential needs of these accounts for commercial surety. While this business may seem like an afterthought, any agency with commercial clients also has commercial surety prospects.
Distinguish surety and insurance
Bonding and insurance both provide for risk taking in exchange for payment and both provide protection against loss.
Insurance is usually a two-party contract between an insurance company and a policyholder that provides financial protection to the policyholder. Unlike an insurance policy, a commercial surety bond is a three-party contract between the principal who purchases the bond (and remains liable to the surety for any loss), the surety company issuing the bond, and the creditor who is protected by the obligation. The main differences are that while insurance and surety are risk transfer mechanisms, surety bonds protect a third party, not the buyer, and the buyer is ultimately responsible to the surety for any loss incurred.
There is a world of opportunity for agents to serve the commercial bond market. Here is an overview of commercial bonds and some market information.
What is the definition of a commercial bond?
Surety bonds “provide financial protection to businesses, families and consumers by ensuring that contractual obligations are met through the security of a surety bond,” says the Surety and Fidelity Association of America (SFAA). A surety bond is “a written agreement, often required by law, to secure the performance or payment of another company’s obligation under a separate contract or compliance with a law or regulation “.
Commercial surety bonds, adds the SFAA, “protect the public (consumers) against fraud, misrepresentation, and financial risk and are generally required by federal courts, government agencies, financial institutions, and private corporations as part of company’s licensing process”.
In other words, commercial bonds are financial instruments intended to protect a third party (such as taxpayers or the general public) from financial harm caused by the actions of a person doing business in the jurisdiction of an entity. governmental.
Here’s an example: A liquor bond is required of sellers of alcoholic beverages to ensure they pay the appropriate taxes on their sales. The liquor store (known as the principal) purchases a commercial bond from a company (known as the surety); the government entity (known as the creditor) holds the bond and can demand that it be repaid in full if the liquor store fails to meet its financial obligations.
Commercial surety bonds are designed to indemnify a creditor against any damages caused by the principal.
Why do businesses need commercial bonds?
Simply put, companies must have these obligations to be in business. Businesses and professionals purchase commercial bonds not to protect their own business, but the taxpayer, government entity, or other creditor (i.e., a party to whom they have an obligation).
Commercial bonds are necessary for businesses to comply with regulations from a government entity. Many local, state, or federal government entities require bonds, which are designed to guarantee the financial or operational performance of one business that serves another. (Commercial bonds are distinct from construction bonds, which are designed to secure a contractor’s performance on a construction project.)
Bonds are often the price of entry for a number of business ventures. An example is a lottery bond, which is required of those who sell lottery tickets to ensure that those sellers remit the appropriate revenues and taxes to the lottery authority after taking possession of the lottery tickets they then sell.
What are common trade bonds and what are they used for?
Commercial bonds fall into four categories: license and permit bonds, public official bonds, court bonds and miscellaneous bonds.
A common type of commercial bond is a license and permit bond. Required of a variety of businesses that operate in local municipalities, license and permit requirements are designed to ensure that these businesses operate in accordance with government requirements.
Typically, license bonds are required for business enterprises that need to have a government license or registration for their business. These businesses include most types of contractors, car dealerships, mortgage brokers, many retail services, and licensed professionals.
A permit bond is used to secure the performance of an action in relation to a government permit. An example is when a business wants to put up a banner on a street to advertise an event. Typically, before the banner can be hung, the municipality requires a bond for the removal of the banner and reimbursement for the cost of any damage caused by it.
Public official bonds are another common type of commercial bond. Used by court clerks, judges, notaries public, and tax collectors, among others, they ensure the faithful discharge of their fiduciary responsibilities in the management of public funds. Judicial obligations, on the other hand, are required by the court for parties involved in civil and criminal cases.
Common miscellaneous bonds include financial security, lost bonds, indemnities and non-construction performance bonds. Commercial performance bonds are particularly relevant for service businesses such as maintenance, janitorial, tree trimming or window cleaning businesses.
Trade bonds are widely used in a range of industries such as agriculture, distribution and warehousing, hospitality, manufacturing, retail, service providers, transportation and wholesale trade. Agricultural businesses, for example, commonly use surety bonds to guarantee that they will operate according to the rules set forth in the federal Packers and Stockyards Act.
What are loyalty bonds?
Loyalty bonds protect business owners from financial loss caused by the dishonest misconduct of its employees, explains the SFAA.
Also known as employee dishonesty insurance, fidelity bonds differ from commercial bonds in that they are not three-party bonds, but rather two-party insurance policies (involving the employer and insurance company).
Employee dishonesty insurance is also known by the following terms: financial institution bond, commercial crime policy, employee dishonesty bond, and crime insurance coverage.
What license does an independent agent need to sell commercial bonds?
To sell commercial surety bonds, a professional must hold a general insurance license.
How does an agent determine the amount and price of a commercial bond?
Much of the determination of the bond amount is done in accordance with laws and regulations. Obligation premiums are set by the carriers and determined largely by incurred losses and market competition.
Cindi Streblo is responsible for surety talent and business development for Westfield. A leading property and casualty insurance company founded in 1848, Westfield offers personal insurance in 10 states, commercial insurance in 21 states, and specialty and bonding products in all 50 states. He is based in Westfield Center, Ohio. Streblo has over 25 years of industry experience, spending the majority of his career in property and casualty insurance sales and underwriting. She can be reached at [email protected].