Independent insurance agents have a crucial role in serving the risk management and property-casualty insurance needs of businesses.

It’s important to pay attention to those accounts’ potential needs for commercial surety bonds, too. While this business might seem an afterthought, any agency with commercial lines customers also has commercial surety prospects.

Distinguishing between surety and insurance

Surety and insurance both provide for an assumption of risk in exchange for payment, and both provide protection against loss.

Insurance typically is a two-party contract between an insurance company and a policyholder that provides financial protection for the policyholder. Unlike an insurance policy, a commercial surety bond is a three-party contract between the principal who purchases the bond (and remains obligated to the surety for any loss), the surety company that issues the bond, and the obligee who is protected by the bond. The key differences are that while both insurance and surety are risk transfer mechanisms, bonds protect a third party, not the purchaser, and the purchaser is ultimately liable to the surety for any losses incurred.

There is a world of opportunity for agents to serve the commercial bonds market. Here’s a look at commercial surety bonds and some information about the market.

What is the definition of a commercial surety bond?

Surety bonds “provide financial protection to businesses, families, and consumers by guaranteeing contractual obligations are met through the securement of a bond,” says the Surety and Fidelity Association of America (SFAA). A surety bond is “a written agreement, often required by law, to guarantee performance or payment of another company’s obligation under a separate contract or compliance with a law or regulation.”

Commercial surety bonds, adds SFAA, “protect the public (consumers) against fraud, misrepresentation and financial risk and are typically required by federal courts, government bodies, financial institutions, and private corporations as part of a company’s licensing processes.”

Put another way, commercial surety bonds are financial instruments to protect a third party (such as taxpayers or the public at large) from any financial damage caused by the actions of someone doing business within the jurisdiction of a government entity.

Here’s an example: A liquor bond is required of alcoholic beverage sellers to assure they pay proper 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 obligee) holds the bond and can call upon it to be made whole if the liquor store fails to meet its financial obligations.

Commercial bonds are designed to make an obligee whole from any damage caused by the principal.

Why do businesses need commercial surety bonds?

Simply put, businesses must have these bonds to be in business. Businesses and professionals buy commercial surety bonds not to protect their own business but the taxpayer, government entity or other obligee (i.e., a party to whom they owe a duty).

Commercial surety bonds are needed for businesses to comply with regulations of a government entity. Many local, state or federal government entities require surety bonds, which are designed to guarantee the financial or operational performance of a business that is serving another. (Commercial bonds are distinct from construction bonds, which are designed to assure a contractor’s performance in a building project.)

Surety bonds are often the entry price for any number of commercial businesses. One example is a lottery bond, which is required of those that sell lottery tickets to assure that these sellers remit the proper revenues and taxes to the lottery authority after taking possession of lottery tickets that they then go on to sell.

What are common commercial bonds and what are they used for?

Commercial bonds come in 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 bonds are designed to guarantee that these businesses perform in line with government requirements.

Typically, license bonds are needed by commercial businesses that must have a government license or registration for their business. These businesses include most types of contractors, auto dealers, mortgage brokers, many retail services and licensed professionals.

A permit bond is used to guarantee performance of an action in relation to a government permit. One example is when a business wants to set up a banner across 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 of the cost of any damage caused by it.

Public official bonds are another common type of commercial bond. Used by court clerks, judges, notary publics and tax collectors, among others, these guarantee faithful performance to their fiduciary responsibilities in handling public funds. Court bonds, by contrast, are required by the court for parties involved in civil and criminal court cases.

Common miscellaneous bonds include financial guarantee, lost securities, indemnity and non-construction performance bonds. Commercial surety performance bonds are especially relevant to service businesses such as maintenance, janitorial, tree-trimming or window cleaning companies.

Commercial bonds are used widely across a range of industries such as agriculture, distribution and warehousing, hospitality, manufacturing, retail, service contractors, transportation and wholesale. Agricultural companies, as an example, commonly use surety bonds to provide a safeguard that they will operate in line with rules laid out in the federal Packers and Stockyards Act.

What are fidelity bonds?

Fidelity bonds protect business owners from financial losses caused by its employees’ dishonest misconduct, explains SFAA.

Also known as employee dishonesty insurance, fidelity bonds are distinct from commercial bonds in that they are not three-party bonds but rather are two-party insurance policies (involving the employer and the insurance company).

Employee dishonesty insurance also is known by the terms: financial institution bonds, commercial crime policy, employee dishonesty bond, and crime insurance coverage.

What license does an independent agent need to sell commercial surety bonds?

To sell commercial surety bonds, a professional must have a property-casualty insurance license.

How does an agent determine the amount and price of a commercial surety bond?

Much of the determination of a bond amount is done according to statutes and regulations. Bond premiums are set by the carriers and determined largely by loss experience and market competition.

Cindi Streblo is surety talent and business development leader for Westfield. A leading property-casualty carrier founded in 1848, Westfield provides personal insurance in 10 states, commercial insurance in 21 states and specialty and surety products in all 50 states. It is based in Westfield Center, Ohio. Streblo has over 25 years of experience in the industry, spending a majority of her career in property-casualty sales and underwriting. She can be reached at [email protected].

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