What is an Agricultural Dealer bond?
Agricultural dealer bonds are a subset of the broader financial guarantee bond category that must be filed with the state government agency responsible for regulating agricultural product sales activity in the dealer’s jurisdiction. Agricultural dealers buy and sell products such as fruits, vegetables, and livestock. The bond guarantees payment to producers and other agricultural dealers for purchased produce and/or livestock.
Agricultural dealer 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 an agricultural dealer bond, will also be referred to as the “surety company” or the “bond company”. Agricultural dealer bonds refer to the dealer as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is an Agricultural Dealer bond required?
Agricultural dealers are required to purchase financial guarantee bonds to protect a government agency by transferring to a surety bond company the cost of ensuring the state is compensated for damages resulting from an agricultural dealer breaking dealer license law. The surety company provides the government a guarantee (the surety bond) that dealers of agricultural products will receive payment for financial damages due to a violation of the statutes and regulations referenced in the bond form up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, agricultural dealers 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.
Agricultural dealer bond violations triggering a bond payout may include a dealer failing to provide payment to their suppliers and fraudulent or dishonest acts within the course of buying and selling agricultural products
How much does an Agricultural Dealer bond cost?
Agricultural dealer bonds generally cost between 2% and 8% of the bond limit.
Example: $10,000 Agricultural Dealer Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 680 or above | 2.0% | $200 |
| 650-675 | 2.5% | $250 |
| 625-649 | 4.0% | $400 |
| 600-624 | 5.0% | $500 |
| 550-599 | 7.5% | $750 |
| 500-549 | 8.0% | $800 |
The actual cost of a specific agricultural dealer bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the dealer’s payment history, experience and creditworthiness.
Is a Credit Check Required for Agricultural Dealer Bonds?
Credit checks are required for agricultural dealer bonds and, 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 an Agricultural Dealer bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and dealer (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 dealer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in an agricultural dealer 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 agricultural dealer 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. Agricultural dealer 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 dealer 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 dealer failing to pay premiums due, claim payouts, or material changes in the dealer’s credit score. Agricultural dealer 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”). Agricultural dealer bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.