What is an ARC bond?
Airlines Reporting Corporation bonds are a subset of the broader financial guarantee bond category that must be filed with the Airlines Reporting Corporation (“ARC”), a private company which provides ticket transaction settlement services between airlines and travel agencies.
ARC bonds must be issued by insurance carriers admitted in the Commonwealth of Virginia, the state where ARC is headquartered. The insurance carrier issuing any surety bond, such as an ARC bond, will also be referred to as the “surety company” or the “bond company”. ARC bonds refer to the travel agency as the Principal, the surety bond company as the Obligor and ARC as the Obligee.
Why is an ARC bond required?
Travel Reporting agencies are required to purchase ARC bonds as a condition to protect the ARC by transferring to a surety bond company the cost of ensuring the ARC is compensated for damages resulting from a travel agency breaking the terms of the reporting agreement. The surety company provides the ARC a guarantee (the surety bond) that the ARC will receive payment for financial damages due to a violation of the agreement up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, reporting agencies are responsible for their actions and required by law to reimburse the surety company for any payments made under the bond or face a revocation of the reporting agreement and/or civil action.
ARC bond violations triggering a bond payout may include a reporting agency failing to provide payment to the ARC for any instruments issued on their behalf.
How much does an ARC bond cost?
ARC bonds generally cost between 2% and 8% of the bond limit.
Example: $10,000 ARC Bond Cost
|Credit Score||Premium Rate||Bond Cost|
|680 or above||2.0%||$200|
The actual cost of a specific ARC bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the travel agency’s history, experience and creditworthiness..
Is a Credit Check Required for ARC Bonds?
Credit checks are required for ARC 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 ARC bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and travel agency (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 travel agency via higher bond premiums, stricter underwriting or collateral. The primary text to consider in an ARC bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
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 ARC 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. ARC bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the travel agency 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 travel agency failing to pay premiums due, claim payouts, or material changes in the travel agency’s credit score. ARC 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.
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”). ARC bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.