Finance

Intro to Commercial Surety Bonds

Sponsored by SFAA: Important Uses for Commercial Surety
SFAA | February 28, 2017

A bond is a type of insurance, issued by insurance companies called sureties, that serve as a risk mitigation tool for states and localities. They have two key benefits: protection and prequalification. Commercial surety bonds are required by state regulatory agencies before a company can be licensed or permitted to do business in an industry, providing additional consumer protection.

Important Uses for Commercial Surety

Commercial surety bonds are an integral part of the regulatory scheme for many businesses, occupations and activities. State agencies value the surety’s prequalification in industries such as mortgage banking, real estate, health clubs and auto sales. Commercial surety bonds can be used in a variety of situations, especially in any industry that accepts money from consumers for services rendered later. Some of the most significant types of commercial surety bonds that protect consumers and enforce public policy are:

  • License and Permit Bonds: State law, municipal ordinances or regulations require these bonds if a company seeks to obtain a license or permit. If a principal violates its obligations, this bond pays the obligee (the government agency) or other third party (for example, defrauded consumers).

Specific types of license and permit bonds include:

  • Money Transmitter Bonds: A surety bond that guarantees money transmitters offer services in compliance with state regulations.
  • Mortgage Broker Bonds: A bond required for a mortgage broker to be licensed in a state. The bond typically requires that the broker will conduct his or her professional activities in accordance with statutes and regulations. The bond is usually required by a regulatory agency, such as the Department of Insurance or Department of Finance.
  • Reclamation Bonds: Required by a state regulatory agency, such as the Bureau of Land Management or Department of Environmental Quality, for a business that seeks to mine or perform related activities on public lands. These bonds provide a financial guarantee that the cleanup costs associated with mining will be covered and that the lands will be restored or reclaimed.
  • Subdivision Bonds: Required by local development authorities that issue development permits. Developers are required to provide this bond if they are going to disturb a plot to sell lots or homes. They must provide a bond to guarantee their obligation to install improvements, such as water and utilities, and that the work is completed in compliance with state and local statutes and regulations.

To learn more about the role of commercial surety bonds in state and local government, download “A Government Leader’s Guide to Bonds”.

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