What is a Third Party Administrator Bond?

Third party administrator bonds are a subset of the broader license bond category that must be filed with the state government agency responsible for regulating insurance administration in the administrator’s jurisdiction as a condition of licensure for most third party administrators (“TPA’s”), employee benefits administrators, or insurance claims administrators. Third party administrators act as an individual or organization and offer services in accordance with a service contract for a separate entity. Services typically include processing employee benefits and insurance claims.

Third party administrator bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a TPA bond, will also be referred to as the “surety company” or the “bond company”.

Why is a Third Party Administrator Bond required?

Third party administrators are required to purchase license bonds by state statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the public is compensated for damages resulting from a TPA breaking specifications of their service contract. The surety company provides the government a guarantee (the surety bond) that the customers of a  licensed TPA will receive payment for financial damages due to a violation of the statutes and regulations pertaining to the third party administrator license up to a limit specified in the bond (“penal sum” or “bond amount”). The bond company also directly receives claims from the public and determines the validity of claims. Ultimately, TPA’s are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension. TPA bonds refer to the administrator as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.

Third party administrator bond violations triggering a bond payout may include a TPA misappropriating any funds provided by clients, operating without their state required license, or committing fraudulent or dishonest acts.

How much does a Third Party Administrator Bond cost?

Third party administrator bonds generally cost between 1% and 5% of the bond limit. 

Example: $10,000 Third Party Administrator Bond Cost

Credit Score Premium Rate Bond Cost
650 or above 1.0% $100
625-649 1.25% $125
600-624 2.5% $250
575-599 3.0% $300
500-574 5.0% $500
 

The actual cost of a specific third party administrator bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the TPA’s license history, experience and creditworthiness. 

Is a Credit Check Required for Third Party Administrator Bonds?

Credit checks are required for third party administrator bonds. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.

How does the wording in the bond form impact the cost of a Third Party Administrator Bond?

The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and third party administrator (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will  ultimately be passed on to the TPA via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a TPA bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.

Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 third party administrator bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. TPA bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.

Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the third party administrator and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the TPA failing to pay premiums due, claim payouts, or material changes in the TPA owner’s credit score. TPA bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.

Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Third party administrator bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.  

Where can I find more information on a specific Third Party Administrator Bond?

To find information on specific third party administrator bonds, select the state and use our search function to find any requirement across the country.

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